-

Mr. Kumar Saurabh

Preface
Conceptualization of a project and then realistic planning for its completion are crucial for
success of the project. As time and cost are most common features for any project so it is always
important to implement projects timely and cost effectively manner.
A comprehensive document is needed for project management for managers and policy makers.
This book will fits the bills in this era when cost of projects and their timely implementation
have become more significant and essential as never before keeping in view the growing
completion both from within the country and by multi-nationals. Once the viability and timeframe of the project is established, a project cannot bear much deviation in implementation.

(Kumar Saurabh)

Updated Syllabus
Course Objective:
The objective of the course is to make the students familiar with the planning, analysis,
selection, implementation and review the capital expenditure investments with special
reference to infrastructure projects. The aim is to acquaint the student with the application of
mathematical and statistical tools for analyzing managerial problems in order to arrive at a
decision w.r.t. the capital expenditures. They shall be exposed to fundamental optimization
procedures and techniques, which are used in Project Management.

Course Contents:

Module I: Planning of Projects

Introduction to Capital and Infrastructure Projects, Overview and Resource Allocation Framework,
Generation and Screening of Project Ideas, Project Identification.

Module II: Analysis & Selection of Projects

Project Design, Market and Demand Analysis, Technical Analysis, Financial Analysis, Environmental
Impact Analysis, Estimation of Project Cash Flows, Analysis of Risk, Appraisal Criteria, Project Financing,
Complex Investment Decisions under Inflation, Capital Rationing, Mathematical Programming Models
for Project Selection, Social Cost Benefit Analysis, Preparation of Detailed Project Report

Module III: Project Implementation

Forms of Project Organization, Human Aspect of Project Management, Pre-requisites of Successful
Implementation, Network Analysis CPM & PERT, Scheduling and Resources Allocation & Leveling

Module IV: Project Review and Control

Cost & Time Control, Performance Examination, Project control systems under Management Control

Module V: Project Examination

Examination of Projects for further Recommendations, Impact analysis, Project Auditing, Project
Termination and Abandonment Analysis

Text & References:

Text:
Chandra P., Projects: Planning, Analysis, Financing, Implementation & Review, 4 th Ed. Tata
McGraw-Hill Publishing
References:
Meredith J.R. & Mantel S.J., Jr., Project Management: A Managerial Approach, 4 th Ed. John
Wiley & Sons
Machiraju H.R., Introduction to Project Finance: An Analytical Perspective, Vikas Publishing
House Pvt. Ltd.
Patel B.M., Project Management: Strategic Financial Planning Examination & Control, Vikas
Publishing House Pvt. Ltd.
Finnerty J. D, Project Financing: Asset-Based Financial Engineering, Wiley
Newbold C.R., Project Management in the Fast Lane: Applying Theory & Constraints, St. Lucie
Press
Diwan P., Project Management, Deep & Deep Publications
Anthony R.N. & Govindrajan V, Management Control Systems. Tata McGraw -Hill
Desai V., Project Management, Himalaya Publishing House
Thakur D., Project Formulation & Implementation, Deep & Deep Publications
Dayal R., Zachariah P. & Rajpal K., Project management, Mittal Publications
Goel B., Project Management: A Development Perspective, Deep & Deep Publications

INDEX

Chapter no. Subject

Page no.

Planning of Projects

Analysis & Selection of Projects

50

Project Implementation

159

Project review and Control

184

Project Examination

199

Key to end chapter quizzes

216

Chapter-1
Planning of Projects
S. No.

Content

Page no.

1.

Project

2.

Project Management

13

3.

Project Life Cycle

18

4.

Project Initiating and Concept Development

22

5.

Project Initiation, Resource Allocation, Idea Generation and Creativity

28

6.

Example of Capital Infrastructure Project

39

Planning of Projects
Project management is a professional discipline combining systems, techniques and people to
achieve a business objective within defined parameters of time, budget and quality. It employs
creative problem solving processes designed to recognize and solve problems as they arise, and
also to proactively anticipate and avert potentially detrimental situations. It is based on ethical
and honest behavior using best practice techniques.
An important aspect of project management is the building and maintaining of effective
relationships with all those involved in the project through a participative and open
communication process.
Project management is developed out of attempts of some sections of mankind to destroy all
others to protect themselves from the onslaught of others. It is one of the fields of study that has
developed by the armies all over the world. If ancient projects such as construction of the great
China Wall, building of Egyptian Pyramids which are all magnificent projects by any definition,
modern project management is said to have started with Manhattan Project, which was
undertaken in the US during the second world war, to develop the atomic bomb.
Project management is a term thats often bandied about today. It first became popular in the
early 1960s, driven by businesses which realized that there were benefits to be gained from
organizing work into separate, definable units and from co-coordinating different kinds of skills
across departments and professions. One of the first major uses of project management was to
handle the US space programmed, and governments, military organizations, and the corporate
world have all since adopted the discipline.
Although the term is now universally familiar, not very many people fully understand exactly
what project management involves. We tend to think of it as common sense, and that anyone can
manage anything by being calm and well-organized. These are qualities that a project manager
definitely needs, but other things are essential too. Project management is, in fact, a structured
way of working and recording events that can bring order and coherence to any set of tasks with
a predetermined goal. This action list sketches the outlines of that structure.

Project
Organizations perform work and work generally involves either operations or projects, although
the two may overlap on each other. The characteristics of operations and projects are:
Both are performed by people.
Both have constrained by limited resources.
Both need to be planned, executed, and controlled.
Projects are often implemented as a means of achieving an organizations strategic plan.
Operations and projects differ primarily in that as operations are ongoing and repetitive while
projects are temporary and unique. A project can thus be defined in terms of its distinctive
characteristic as a project is a temporary endeavor undertaken to create a unique product or
7

service. Where temporary means that every project has a definite beginning and a definite end
and unique means that the product or service is different in some distinguishing way from all
other products or services. For many organizations, projects are a means to respond to those
requests that cannot be addressed within the organizations normal operational limits.
Projects are undertaken at all levels of the organization. They may involve a single person or
many thousands. Their duration ranges from a few weeks to more than five years. Projects may
involve a single unit of one organization or may cross organizational boundaries, as in joint
ventures and partnering. Projects are critical to the realization of the performing organizations
business strategy because projects are a means by which strategy is implemented. A project may
be anything like:
Developing a new product or service
Effecting a change in structure, staffing, or style of an organization
Designing a new transportation vehicle
Developing or acquiring a new or modified information system
Constructing a building or facility
Building a water system for a community in a developing country
Running a campaign for political office
Implementing a new business procedure or process
Project management means managing a project. But what does that project means, and why did
project management become a separate branch of study. First study what the project means, a
project is a temporary process, which has a clearly defined start and end time, a set of tasks, and
a budget, that is developed to accomplish a well-defined goal or objective.
A project is initiated by a person or group who realizes that a specific problem needs resolution.
When the problem is defined, an initial concept is developed around potential solutions. Once the
project concept is defined, then a complete project plan can be developed. It is the execution of a
well developed project plan which then leads to project success.
A project is a specific, finite task to be accomplished. Whether large or small scale or whether
long or short run is not particularly relevant.
A project is synthesizing predetermined amounts of the resources of an organization in designing
and executing its strategies that will assist the organization in designing and executing strategies.
A commercial project involves the following key considerations:
(i). What is the cost of monetary project?
(ii). What is the time required?
(iii). What are the capabilities that it provides to the organization?
(iv). Whether it will fit into the strategies of the organization?
Temporary Project
Temporary means that every project has a definite beginning and a definite end. The end is
reached when the projects objectives have been achieved, or when it becomes clear that the
project objectives will not or cannot be met, or the need for the project no longer exists and the

project is terminated. Temporary does not necessarily mean short in duration; many projects last
for several years. In every case, however, the duration of a project is finite; projects are not
ongoing efforts. In addition, temporary does not generally apply to the product or service created
by the project. Projects may often have intended and unintended social, economic, and
environmental impacts that far outlast the projects themselves. Most projects are undertaken to
create a lasting result. For example, a project to erect a national monument will create a result
expected to last centuries. A series of projects and/or complementary projects in parallel may be
required to achieve a strategic objective.
The objectives of projects and operations are fundamentally different. The objective of a project
is to attain the objective and close the project. The objective of an ongoing non projectized
operation is normally to sustain the business. Projects are fundamentally different because the
project ceases when its declared objectives have been attained, while non project undertakings
adopt a new set of objectives and continue to work.
The temporary nature of projects may apply to other aspects of the endeavor as well:
The opportunity or market window is usually temporarymost projects have a limited time
frame in which to produce their product or service.
The project team, as a team, seldom outlives the projectmost projects are performed by a team
created for the sole purpose of performing the project, and the team is disbanded when the
project is complete.
A project is considered to be a temporary process because once the end goal is achieved, the
project is complete. For this reason, the end point of a project needs to be defined at the very
beginning of the project to ensure successful completion. The reason why some projects never
end is because no one ever defined what constitutes completion of a project.
The basic questions for defining success criteria are:
Why are we doing this project?
What do we hope to change?
How will we measure success?
Criteria for project success are quantifiable and measurable, and are expressed in terms of
business value.
Well-Defined Goals - Projects require well-defined goals to determine project completion.
Without well-defined goals and objectives, a project lacks purpose.
Project Constraints - All projects have constraints and these need to be defined from the onset.
Projects have resource limits in terms of people, money, time, and equipment. While these may
be adjusted, they are considered fixed resources by the project manager. These constraints form
the basis for planning the project.
Various other definitions of a Project:

A project is a complex of non-routine activities that must be completed with a set amount of
resources and within a set interval.
-Clifford Gray
A project is a specific activity which uses resources to gain benefits; it has a specific starting
point and ending point intended to accomplish a specific objective. It is measurable both in its
major costs and returns.
- J. Price Gittinger
A Project is a temporary endeavor undertaken to create a unique product or service.
-Project Management Institute
A project is a group of unique, inter-related activities (elements of work performed) that are
planned and executed in a sequence to create a unique product or service, within a specified time
frame, budget and clients specifications.
A project is a unique set of coordinated activities, with definite starting and finishing points,
under taken by an individual or organization to meet specific objectives within the defined
schedule, cost and performance parameters.
Examples of some projects:
1. Construction of a Dam for better irrigation facilities
2. Construction of National Highway
3. Conducting Afro-Asian Games
Nature and Distinctive Characteristics of Projects
Nature:
1. Projects differ from stereotyped business activities and they are unique.
2. Each project is different in itself.
3. Projects are not homogeneous however similar they may be.
4. Two projects cannot be compared.
5. To perform unique tasks, organizations adopt project approach.
Characteristics
1. Unique Activities: The projects are generally unique and do not repeat. However, there
can be some variability in design, completion period, etc. For example, Ship Building is
an unique project.
2. Specific Goals: Project undertakes different tasks to attain different specific goals. Every
project is goal-oriented.
3. Sequence of activities: A project follows particular sequence to deliver the end product.
4. Specified Time: All projects will have a specified time for completion i.e. both starting
and ending points.
5. Inter-related Activities: Most of the projects will have technically inter-related
activities viz. input-output-input-output (e.g. Hotel, Hospital, etc.).
Distinctive Characteristics:
Specific and clear objectives as to time, budget, quality, etc.
Temporary establishment

10

Insurmountable funds.
Time-bound
Entangled with collaborating groups
Focus on risk and uncertainty
The above properties determine the concept of project management, which is considered
as the task of directing unique and novel undertakings.

Characteristics of Successful Projects

1. Clear objectives - The most successful projects clearly define objectives from the outset.
2. A good project plan - A carefully thought-out plan serves two purposes. First, it allows
everyone involved to understand and perform their part in the project. It shows who is
responsible for what and estimates how much money, people, equipment and time will be
required to complete the project. Second, it serves as a monitoring tool, allowing you to take
early action if things go wrong.
3. Communication, communication, communication - Project is a collaborative effort between all
of the individuals and organizations involved. They need to work together to maintain effective
and continual communication between the parties.
4. A controlled scope - Numerous issues will come up throughout the project, and not all of them
will contribute to the overall objectives. It is important to stay focused on the priorities, with
little wasted time or attention.
5. Stakeholder support - Projects typically involve several stakeholders, who invest time and
resources in the project. It is important to maintain stakeholder support throughout the project, so
the project team can meet its objectives.
Every sponsor of a project shall ask himself: How many of these characteristics does my project
have? How can I improve it?
Project Parameters:
The parameters that influence a project which is generally complex in nature are: Scope (Covers all activities, financial/human resources, end-products, target outcomes,
customers, outputs, work, etc.)
Quality (Requires satisfying product and process quality. Tools and techniques of quality
management to be used ISO standards SQC, JIT, TQM, etc.)
Time (Time is inversely proportional to cost. If time decreases, cost increases. Time is
managed by activity scheduling).
Cost (Cost is associated with all the activities in both planning and implementation
process).
Resources (People, fiancs, physical resources, and information required to perform
project activities).

11

RELATIONSHIP BETWEEN PROJECT PARAMETERS

CONSTRAINTS
1. Time

INFLUENCED BY

Scope & Quality of

Project

2. Cost
3. Resources
DEPENDS UPON
PROJECT

Success of a Project

Dynamic System
(Project) in
Equilibrium.

MANAGERS ABILITY
TO KEEP

RESOURCE
ALLOCATION

COST

Project Scope & Quality

(Goals)
TIME

Scope Triangle

Project
Characteristics
Time Span
Risk Level
Complexity
Level
Technology
Probability
Problems

Classification of Projects Based on Their Characteristics

Project Class
I
II
III
IV
18 months or 9 to 18 months
more
High
Medium

3 to 9 months
Low

3 months
less
Very Low

High

Medium

Low

Very Low

Break Through

Contemporary

Best

Practical

10% (Low)

No Risk

of 100 % (Certain) 50% (Likely)

or

12

A project includes all activities to complete a given job. A program is defined as an ongoing
operation indefinitely. It has a great scope and has longer duration than a project. A project is a
part of program, which can be put into the business as quickly as possible. It is a Group of
Projects managed in a co-coordinated way to obtain benefits not available from managing them
individually.
All projects do not involve the same level of managerial skills, costs, technology, or complexity.
The projects can be grouped by taking the degree of uncertainty and system complexity or scope.
Degree of uncertainty ranges from low to high. It is subdivided as Low-tech, medium-tech, hightech, and super-tech. based on system complexity a project and array project. Assembly projects
have low complexity whereas Array projects have high complexity.

(Degree of Uncertainty)
Super-Tech

Enterprise resource planning

Implementation in MNC

High-Tech

New shrinkwrappedsoftware

Medium-Tech

Low-Tech

Advanced radar

New Cell phone

Construction

Auto repair

Projects
Assembly Projects

System Project

Array Project

Project Management (PM)

Managing a project is called project management. But why that project management is a separate
not only as a discipline of study but in practice as well, from general management. Taking cue
from the way projects are handled in many organizations, its definition may not make very
interesting reading. According to Harold Kerzner, Project Management is the art of creating the
illusion that any outcome is the result of a series of predetermined, deliberate acts, when in fact,
it was dumb luck.
Project Management, in reality, or ideally, is aimed at ensuring that all the line departments
interact with each other to facilitate the horizontal flows of work that are required in a project.
Horizontal flows required by a project do not destroy the vertical flows between different levels
of an organization, but co-exist with them.
Project management is the application of knowledge, skills, tools, and techniques to project
activities to meet project requirements. Project management is accomplished through the use of
the processes such as: initiating, planning, executing, controlling, and closing. The project team
manages the work of the projects, and the work typically involves:

13

_ Competing demands for: scope, time, cost, risk, and quality.

_ Stakeholders with differing needs and expectations.
_ Identified requirements.
It is important to note that many of the processes within project management are iterative in
nature. This is in part due to the existence of and the necessity for progressive elaboration in a
project throughout the project life cycle; i.e., the more you know about your project, the better
you are able to manage it.
The term project management is sometimes used to describe an organizational approach to the
management of ongoing operations. This approach, more properly called management by
projects, treats many aspects of ongoing operations as projects to apply project management
techniques to them. Although an understanding of project management is critical to an
organization that is managing by projects, a detailed discussion of the approach itself is outside
the scope of this document. Knowledge about project management can be organized in many
ways. This document has two major sections and twelve chapters, as described below.
Project management can be defined as planning, organizing, staffing, directing and controlling
some parts of the organization for a relatively short period of time to achieve the project
objectives within the laid down constraints.
Relatively short period of time varies with the type of industry. In construction projects, the
period may be up to five years, in engineering it may be up to three years while a project like
building a missile may take up to ten years.
Cost (budget), time (schedule) and the performance levels required are the constraints on a
project. The objective may be to attain the ability to manufacture a certain products, to lay a road
and bring it to a usable condition or to achieve some other desirable aim.
All of the processes associated with defining, planning and executing the project are considered
part of PM.
PM may be considered as Directing the activities associated with executing a project, while
controlling limited resources efficiently and effectively, ensuring that the end goal is successfully
achieved.
In PM, the management prepares a project plan by estimating approximate time, cost and
resources to accomplish goals mentioned in scope and quality of project as required by
clients/sponsors.
Other Definitions of PM:
1. PM is the application of knowledge, skills, tools & techniques to project activities in order to
meet or exceed stakeholder needs and expectations.
2. PM is a system of procedures, practices, technologies and know-how that enables planning,
organizing, staffing & controlling necessary to successfully manage a project.
3. PM is a carefully planned and organized effort to accomplish one-time effort.
E.g.: Constructing a residential complex

14

Need of Project Management

The decision on whether or not to set-up a separate project management division finally is
subjective, that decision depends on many factors as1. Interdependencies among departments
2. Resource sharing
3. Importance of project
4. Project size
5. Uniqueness of project
6. Market volatility
7. Organization reputation
Interdependencies among departments
Interdependence among various departments of organization is one of the major factors that
dominate decision. If the task to be completed requires that many functionality separated
activities have to be put at one place and if the activities depend on one another, i.e. have to be
carried out in a sequence, project management techniques are definitely required.
In a project for developing and introducing a new product, sales forecast have to be completed
before plans can be made for the manufacturing prices, industrial facilities required, and
marketing can be made. Sales promotion cannot be made and their expenses cannot be estimated
before marketing research reveals what sort of promotion is required. There can be any number
of interdependencies between production, finance, marketing, administration and advertising
departments. More the interdependencies more is the difficulty in pulling all these functions
together.
Resource Sharing
Project management is required when the services of specialized professionals, which may be in
scarcity in the organization and also expensive are required for the project. Project management
techniques help in keeping the resources fully employed, thus reducing both direct and indirect
costs, while ensuring the delivery of the needed services.
Importance of project
Set up of separate project management department depends on the importance of project to the
organization. A project should be viewed upon as something that contributes to the ability of the
organization in succeeding in its future as well. It should be considered as an opportunity to
achieve a target that is yet another step towards its goals achieving its mission.
Project size
Project size is a relative factor but it can be said that when an organization requires substantially
more resources than it normally uses, project management can be gainfully used.
Uniqueness of project
Lack of familiarity or precedent to follow usually creates insecurity and disagreement,
particularly among those at the middle and lower levels of management.
Market volatility

15

With increasing competition in market nature of the market changes continuously. Technological
changes are taking place rapidly and values and behavior of consumers are virtually in a state of
flux.

Organization reputation
If failure in completing the project on time is likely to damage the reputation of organization
substantially, a project management should be seriously considered. An organizations financial
position may be seriously damaged if penalties entail failure to deliver on time.
Implementing a new computerized baking system
PM Includes
1. Developing a Project Plan (Project Goals, How they will be accomplished)
2. Specifying how goals will be accomplished
3. Specifying what resources are needed
4. Relating budgets & time for completion
PM disciplines are:
1. Finance [Financial Statements, Cost of the Project, etc.]
2. Personnel [Selecting Skilled Personnel, Project Manager, Project Team, etc.]
3. Purchases & Logistics
4. R& D [New Product Development & Quality Assurance]
5. Marketing [Marketing Project Idea to Sponsors]
6. Operations [Managing Activities/Operations]

Relationship between Project & Line Management

Success of a project depends upon good relationship between project manager and various
functional managers (line staff).

16

Project Manager should exercise judicious control over resources (money, manpower,
machinery, facilities, materials, technology & information) allocated to project by various
functional departments.
Benefits of Project Management
Major Benefits:
1. Provides techniques for trade-off between conflicting goals & enterprise priorities.
2. Better control of project.
3. Better co-ordination.
4. Reduces developmental time
5. Lowers cost
6. High order results.
Other Benefits:
1. Clear description of work.
2. Identification of responsibilities & assignments for specific tasks. & activities
3. Tracking of functional responsibilities.
5. Easy specification of time limits for task completion.
6. Problems are exposed in advance.
7. Improved skills for future planning.
8. Objectives which cannot be met or exceeded can be identified easily.
9. Measurement of accomplishment against plans is enabled.

17

PROJECT MANAGEMENT KNOWLEDGE AREAS, LIFE CYCLE, AND RECURRING

ACTIVITIES:

SOURCE: PROJECT MANAGEMENT GUIDELINE, Commonwealth of Virginia.

www.vita.virginia.gov/projects/

Project Life Cycle

Projects are unique undertakings; they involve a degree of uncertainty. Organizations performing
projects will usually divide each project into several project phases to improve management
control and provide for links to the ongoing operations of the performing organization.
Collectively, the project phases are known as the project life cycle.
Each project phase is marked by completion of one or more deliverables. A deliverable is a
tangible, verifiable work product such as a feasibility study, a detail design, or a working
prototype. The deliverables, and hence the phases, are part of a generally sequential logic
designed to ensure proper definition of the product of the project.
The conclusion of a project phase is generally marked by a review of both key deliverables and
project performance to date, to a) determine if the project should continue into its next phase and
b) detect and correct errors cost effectively. These phase-end reviews are often called phase
exits, stage gates, or kill points.

18

Each project phase normally includes a set of defined deliverables designed to establish the
desired level of management control. The majority of these items are related to the primary phase
deliverable, and the phases typically take their names from these items: requirements, design,
build, test, startup, turnover, and others, as appropriate.
The project life cycle serves to define the beginning and the end of a project. For example, when
an organization identifies an opportunity to which it would like to respond, it will often authorize
a needs assessment and/or a feasibility study to decide if it should undertake a project. The
project life-cycle definition will determine whether the feasibility study is treated as the first
project phase or as a separate, standalone project.
The project life-cycle definition will also determine which transitional actions at the beginning
and the end of the project are included and which are not. In this manner, the project life-cycle
definition can be used to link the project to the ongoing operations of the performing
organization.
The phase sequence defined by most project life cycles generally involves some form of
technology transfer or handoff such as requirements to design, construction to operations, or
design to manufacturing. Deliverables from the preceding phase are usually approved before
work starts on the next phase. However, a subsequent phase is sometimes begun prior to
approval of the previous phase deliverables when the risks involved are deemed acceptable. This
practice of overlapping phases is often called fast tracking.
Project life cycles generally define:
_ What technical work should be done in each phase (e.g., is the work of the architect part of the
definition phase or part of the execution phase?).
_ Who should be involved in each phase (e.g., implementers who need to be involved with
requirements and design).
Project life-cycle descriptions may be very general or very detailed. Highly detailed descriptions
may have numerous forms, charts, and checklists to provide structure and consistency. Such
detailed approaches are often called project management methodologies.
Most project life-cycle descriptions share a number of common characteristics:
_ Cost and staffing levels are low at the start, higher toward the end, and drop rapidly as the
project draws to a conclusion.
_ The probability of successfully completing the project is lowest, and hence risk and uncertainty
are highest, at the start of the project. The probability of successful completion generally gets
progressively higher as the project continues.
_ The ability of the stakeholders to influence the final characteristics of the projects product and
the final cost of the project is highest at the start and gets progressively lower as the project
continues. A major contributor to this phenomenon is that the cost of changes and error
correction generally increases as the project continues.
Care should be taken to distinguish the project life cycle from the product life cycle. For
example, a project undertaken to bring a new desktop computer to market is but one phase or
stage of the product life cycle.

19

Although many project life cycles have similar phase names with similar deliverables required,
few are identical. Most have four or five phases, but some have nine or more. Even within a
single application area, there can be significant variations
one organizations software development life cycle may have a single design phase while
anothers has separate phases for functional and detail design.
Subprojects within projects may also have distinct project life cycles. For example, an
architectural firm hired to design a new office building is first involved in the owners definition
phase when doing the design, and in the owners implementation phase when supporting the
construction effort. The architects design project, however, will have its own series of phases
from conceptual development through definition and implementation to closure. The architect
may even treat designing the facility and supporting the construction as separate projects with
their own distinct phases.

Project life cycle can be divided into phases. These phases correspond with changes in the level
of activity or effort put into the project and uncertainty regarding the final outcome of the
project.
Phase I: Conception & Selection
Phase II: Planning & Scheduling
Phase III: Implementation, Monitoring & Control
Phase IV: Evaluation & Termination
The level of activity, in any project, starts at a low level and then rises slowly. In conception &
selection phase, before it is decided whether or not something is a worthwhile idea or which of
the several alternative ideas should be proceeded with, the activity is naturally low and is
confined to conducting feasibility studies, estimating revenues and costs, etc. In this phase
amount spent is also low, as the number of employees working on it.
The functions to be performed by the project manager or the team working on the project are:1. Identifying a need for a project
2. Establishing goals to be achieved by the project
3. Estimating the amount that the firm will have to commit for the project.

20

4. Presenting the project idea or various alternative ideas to the management and get their
approval.

Once selection of project and its approval by the management are through, the project enters in
the second phase. This next phase is actual implementation phase. Planning includes deciding on
what are the activities to be undertaken for implementing the project, while scheduling is fixing
timing frames for the activities. The level of activity and also the project cost rise sharply in
during this phase.
The functions to be carried out in this phase are:
1. Set-up a technical team to decide on how the project can be implemented.
2. Plan for the requirements of resources
3. Prepare a schedule keeping in view the completion date.
The next phase is the actual implementation of the project, and monitoring and controlling the
implementation. The project cost reaches its peak during this stage, as also the level of activity.
The project manager is highly concerned about the costs and does not bother much about the
schedule at the beginning. Concentration on the performance also continues. The major functions
that are to be carried out in this phase are:

21

1. Procurement of material
2. Tools building & testing
3. Support system development
4. Producing the aimed system
5. Evaluating the standard of performance
6. Modifying the performance to suit the requirement of client
Towards the end of this phase the focus of the project manager generally changes to meeting the
schedule than cost or performance.
Final phase is to evaluate what has been done, and hand it over to either the client or the in-house
operational staff. This marks the end of the project management. In this phase activity level
decline steeply and reach to zero. Following are the functions that are carried out in this stage
are:1. Training to operational staff
2. Transfer of material
3. Transfer of responsibilities
4. Releasing surplus resources
5. Releasing the project staff for next assignment

Project Initiating and Concept Development:

Project Management Methodology

The objective of project management methodology is to provide common standards to ensure
that projects are conducted in a disciplined, well-managed, and consistent manner. The ultimate
goals of this methodology are to promote the delivery of quality products that result in projects
which are completed on time, within budget and accomplish the stated business objectives.
The methodology is conceptually shown in the figure below.

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Project Management is an Iterative Process

The arrows indicate that project management is an iterative process. It is not a lock-step
sequence of activities. In some instances, process groups overlap. The delineation between
initiating and planning can sometimes be difficult to distinguish.
Other activities, such as oversight, quality control, and executive review, are ongoing and affect
each and every cycle of the project.
This methodology represents the coordinating mechanism between strategic planning, program
implementation, project implementation and on-going operations, state agencies, Office of
Information Technology, Office of Budget and Planning and the legislature. This methodology
addresses the management of the project only, not the life cycle of a project development effort.
Successful project management requires established processes for organizational planning and
communication, availability of tools that support management processes, and a culture that
values cooperation, teamwork, and planning.
Project management requires general management knowledge. The principles, practices,
concepts, techniques, tools, and skills of general management are the foundation for project
management. These skills include the ability to work well with people, to take responsibility, to
lead a group, and to make decisions.

Risk in Projects
Risk is inherent in all projects. In project management terms, risk refers to an uncertain event
or condition that has a cause and, that if it occurs, has a positive or negative effect on a projects
objectives, and a consequence on project cost, schedule or quality. For example: the cause of a
risk may be requiring a classroom with networked computers for the learners in a skills
development project. The risk event is that Internet connection is delayed and the classroom is
not available for the anticipated start date. This affects the objective of offering computer literacy

23

training to underemployed adults, with the consequence to rent another facility or delay project
activities.
Naturally, it is preferable to maximize the probability and consequences of positive events and
minimize the probability and consequences of events adverse to the project objectives. A risk
response plan can help the project. It identifies the risks that might affect the project, determines
their effect on the project and includes agreed-upon responses for each risk.
The Risk Management Strategy
Identifying Risks:
The first step in creating a risk response plan is to identify risks which might affect the project.
The project manager, key staff and project partners should brainstorm referring to the project
charter, calendar of activities schedule and budget to identify potential risks. Those involved in
the project can often identify risks on the basis of experience. Published information resources
are also available that identify risks for many application areas.
Common sources of risk in community learning initiatives include:
Technical risks such as unproven technology
Project management risks such as a poor allocation of time or resources
Organizational risks such as resource conflicts with other activities
External risks such as changing priorities in partner organizations
Developing Risk Response Strategies:
One cannot prepare for or mitigate all possible risks, but risks with high probability and high
impact are likely to merit immediate action. The effectiveness of planning determines whether
risk increases or decreases for the projects objectives. Several risk response strategies are
available:
Avoidance changing the project plan to eliminate the risk or protect the objectives from its
impact. An example of avoidance is using a familiar technology instead of an innovative one.
Transference shifting the management and consequence of the risk to a third party. Risk
transfer almost always involves payment of a premium to the party taking on the risk. An
example of transference is using a fixed price contract for a consultants services.
Mitigation reducing the probability and/or consequences of an adverse risk event to an
acceptable threshold. Taking early action is more effective than trying to repair the consequences
after it has occurred. An example of mitigation is seeking additional project partners to increase
the financial resources of the project.
Acceptance deciding not to change the project plan to deal with a risk.
Passive acceptance requires no action. Active acceptance may include developing contingency
plans for action should the risk occur. An example of active acceptance is creating a list of
eligible instructors that can be called upon if last minute replacements are needed for your
project.
Since not all risks will be evident at the outset of the project, periodic risk reviews should be
scheduled at project team meetings. Risks that do occur should be documented, along with their
responses. The lessons learned may be useful to others or on future projects.
Project Constraints and Success
All projects have constraints and these need to be identified at the beginning of the project.
Projects have resource limits in terms of people, money, time and equipment. Constraints may be
adjusted up or down as the project dictates but they are considered fixed resources by a project

24

manager. These constraints form the basis for managing the project and are discussed throughout
this methodology.
Well defined goals will ensure a successful project. The basic criteria for defining project
success can be found by answering, "Why are we doing this project?". Criteria for project
success are quantifiable, measurable, and expressed in terms of business value metrics. They
include:
Customer.
Project (containing a purpose or an objective).
Scope.
Deliverables.
Start and End Dates.
Sponsor.
Identified Resources.
Project Manager.
Components to Project Success:
There are three main component questions that need to be answered to ensure the success of
projects. They are:
1. Does the product/system meet the predefined business needs and goals? This includes business
objectives of cost reduction, increased revenues, better customer service, improved productivity,
etc.
2. Does the completed project match the requirements document?
3. Was the project completed as defined by scope, on time, and on budget?
Project Phases All projects are unique and take on a different form that presents many degrees of
uncertainty. Managing these projects dictate that organizations divide them into manageable
pieces called project phases. Collectively these phases are known as the project life cycle. The
project life cycle methodology is divided into five project phases that are listed below:
1. Initiation - This phase defines and organizes the project. Project justification is outlined in this
phase.
2. Planning - In this phase, a workable project plan is developed that will accomplish the project.
3. Execution - Coordinating and allocating resources and people take place in this phase.
4. Control - Throughout all phases of the project, objectives are monitored and measurements of
project progress are computed. If variances are discovered, corrective actions are initiated to
overcome the problems. Open communication among all project team members is needed in all
phases of the project for success, but in this phase it is imperative.
5. Closeout - This phase formalizes acceptance of the project or product with the customer and
documents lessons learned.
Iterative Process: Project management is an iterative process where the beginning of one phase
often overlaps the ending of another phase. In some instances, phases may be repeated
throughout the life cycle of the project. Phases may be performed sequentially or simultaneously.
For example, planning, execution and control may all be performed in parallel as changes are
made to the project baseline.

Nine Knowledge Areas

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Included in the project phases are nine knowledge areas. The knowledge areas are integrated in
all phases throughout the project. These tools enable the Project Manger to ensure all projects are
conducted in the most organized, efficient manner. They are:
1. Integration Management - Includes the processes required to ensure that various elements of
the project are properly coordinated.
2. Scope Management - Includes the processes required to ensure that the project includes all the
work required, without additional and unnecessary work, to complete the project successfully.
3. Time Management - Includes the processes required to ensure timely completion of the
project.
4. Cost Management - Includes the processes required to ensure that the project is completed
within the approved budget.
5. Quality Management - Includes the process required to ensure that the project will satisfy the
needs for which it was undertaken.
6. Human Resource Management - Includes the processes required to make the most effective
use of people involved in the project.
7. Communications Management - Includes the processes required to ensure timely and
appropriate generation, collection, dissemination, storage, and ultimate disposition of project
information.
8. Risk Management - Is the systematic process of identifying, analyzing, and responding to the
project task.
9. Procurement Management - Includes the processes required to acquire the goods and services
to attain project scope from outside the performing organization.
The relationship between the five project management phases and the nine knowledge areas are
depicted in the Figure shown below:

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Figure: Project Management Phases and Knowledge Areas

Software Development Projects

The management of a software development project can be viewed in three dimensions as shown
in Figure given below. The Product Lifecycle axis describes the work to be done to deliver the
product. One pass through the four phases is a development cycle; each pass through the four
phases produces a generation of the software. These processes are repeated in subsequent cycles
that are called evolution cycles. The Project Management Processes axis delineates five project
management processes that must be performed for every project and every phase thereof. The
Project Management responsibilities axis lists nine areas of responsibility that must be addressed
by the project managers during each of the five project management processes for all projects.

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Project Management Skills & Techniques

Successful project management requires that certain infrastructure components are in an
organization. Many of these components are basic people management skills, organization skills,
time management and communication skills. Project management also requires the application of
these principles with the ability to work well with people, to take responsibility, to make
decisions and to lead people.
Project Initiation, Resource Allocation, Idea Generation and Creativity
Every organization should have a strategic plan, if it should succeed in long run. The strategic
plan should be laid out carefully, keeping all variables in view. Once it is done, all subsequent
actions of the organization, particularly those relating to allocation of substantial amounts of
resources, should conform to the plan. Wise allocations of resources or wise capital expenditure
decisions are the stepping stones for any organizations success.
A. Resource Allocation: Resource allocation is generally done at two levels: One, at the
organization or top level and two, at the department level. At the top level, the distribution of
resources among various departments or administrative units is considered. At the department
level, how the department or unit should utilize the resources allocated to it is decided.
(i) Resource Allocation at the Top Level: Resource allocation by an organization may be made
in different ways. It may be on the basis of functions (marketing, finance, administration) or
geographical areas (as in the case of inter-state departments) or according to the importance of
the service rendered (like in public service). The basis chosen should always be such that it
results in the optimal allocation of resources. This, in turn, depends on how best the organization
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can be divided into divisions, in such a way that each divisions contribution to the achievement
of the strategic objectives of the organization can be identified and measured.
Extent of Central Control
Low
High
Low
Free
Formula
Need for Change
Bargaining
High

Open
Competition

Imposed
Priorities

The pattern of allocation of resources in general depends on two factors: the need for a change in
the existing patterns of allocation in the perception of the management and how centralized the
decision making process is. In addition, it also depends on whether the resources of the
organization are growing or declining and whether a change is called for in the overall resources
and their pattern of deployment. Let us now discuss how resource allocation takes place in
different situations:
(a) Growth in the Resources: When the resources are increasing it is easy to bring about a change
in their relative distribution. It can be achieved by simply directing fresh inflows to the areas
where they are required. An alternative method is to have a central pool of funds and make
allocations from the pool. When there is growth in the resources and central control is strong,
allocation is generally imposed by the center. On the other hand, it may be done by competitive
bidding by the divisions whichever division offers highest productivity will get the funds first.
If the need for change in the present pattern of allocation is not felt strongly, the allocation is
made based on a predetermined formula or on the existing pattern. If the central control is not
strong enough, then funds will be allocated by free bargaining between the divisions and the
center.
(b) Decline in the Resources: When there is a declining trend in the resources available, no
organization can allow resource allocation based on a formula or free bargaining. Allocation is
made either by centrally imposed priorities or competitive bidding. There are two interesting
techniques that are commonly followed in such circumstances. First is amalgamation of one or
more divisions. Savings in resources made by the amalgamation of two or more hitherto separate
divisions, including the surplus staff, are put into the new venture proposed. Second is to reduce
the resources of all other units a little. The total of the amount reduced is pooled and invested in
a separate unit. If the objective is to provide resources to one of the units, the newly created unit
will be eventually merged with the other unit. Otherwise, the new unit continues to be separate.

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(c) Few changes in Resources: If the organization feels that new investments to be made do not
call for a change in the overall pattern of allocation of resources, the allocation will again be
based on either a formula or free bargaining. The formula method, generally, does not satisfy all
the divisions. Objections may be raised about the validity and also the fairness of the formula.
The other extreme of a formula is free bargaining, where the allocation to each unit is started at
zero and increased based on its requirements. In practice, many organizations follow a middle
path. The allocations are first made based on a formula and then adjustments are made to the
allocations through free bargaining.
(ii) Resource Allocation at the Department Level: If resources are allocated to different
departments of an organization based on formula, then the units have to think of the best ways to
deploy them. If allocation is based on open competition or free bargaining, units will have to be
ready with their investment plans. In small organizations where there is only one unit, there is
only one level of allocation. But, whatever may be the levels of allocation, the investment needs
of a department depend on two factors: one, whether it can identify investment opportunities
from its environment and two, whether it has the strategic abilities to take up the opportunities.
Analysis of its strategic abilities itself may often lead the unit to the identification of areas where
it can invest and where it should not. Identifying investment alternatives can be described in two
steps:1. Environment analysis
2. Strategic capabilities analysis
Environment Analysis:
Various techniques are used to analyze the various components or factors in the environment.
Pest and Porters five forces model is the best to analyze environment.
PEST Analysis:
Environment is divided into four components;
1.
2.
3.
4.

Political factors
Economic factor
Socio-cultural factor
Technological factor

Porters Model: The Porter's 5 Forces tool is a simple but powerful tool for understanding
where power lies in a business situation. This is useful, because it helps you understand both the
strength of your current competitive position, and the strength of a position you're looking to
move into.
With a clear understanding of where power lies, you can take fair advantage of a situation
of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an
important part of your planning toolkit.

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Conventionally, the tool is used to identify whether new products, services or businesses have
the potential to be profitable. However it can be very illuminating when used to understand the
balance of power in other situations too.

Strategic capabilities analysis:

1. Resource Audit: The firm considers what all the resources available to it are. Classifying
wherever possible into those that are readily available and those that can be obtained
when required. Both quality and quantity being consider.
2. Value Chain Analysis: The value chain is a systematic approach to examining the
development of competitive advantage. It was created by M. E. Porter in his book,
Competitive Advantage (1980). The chain consists of a series of activities that create and
build value. They culminate in the total value delivered by an organization. The 'margin'

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depicted in the diagram is the same as added value. The organization is split into 'primary
activities' and 'support activities.'

Primary Activities
Inbound Logistics
Here goods are received from a company's suppliers. They are stored until they are needed on
the production/assembly line. Goods are moved around the organisation.
Operations
This is where goods are manufactured or assembled. Individual operations could include room
service in a hotel, packing of books/videos/games by an online retailer, or the final tune for a
new car's engine.
Outbound Logistics
The goods are now finished, and they need to be sent along the supply chain to wholesalers,
retailers or the final consumer.
Marketing and Sales
In true customer orientated fashion, at this stage the organisation prepares the offering to meet
the needs of targeted customers. This area focuses strongly upon marketing communications
and the promotions mix.
Service
This includes all areas of service such as installation, after-sales service, complaints handling,
training and so on.

Support Activities
Procurement
This function is responsible for all purchasing of goods, services and materials. The aim is to
secure the lowest possible price for purchases of the highest possible quality. They will be
responsible for outsourcing (components or operations that would normally be done in-house
are done by other organisations), and ePurchasing (using IT and web-based technologies to
achieve procurement aims).

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Technology Development
Technology is an important source of competitive advantage. Companies need to innovate to
reduce costs and to protect and sustain competitive advantage. This could include production
technology, Internet marketing activities, lean manufacturing, Customer Relationship
Management (CRM), and many other technological developments.
Human Resource Management (HRM)
Employees are an expensive and vital resource. An organisation would manage recruitment and
s election, training and development, and rewards and remuneration. The mission and objectives
of the organisation would be driving force behind the HRM strategy.
Firm Infrastructure
This activity includes and is driven by corporate or strategic planning. It includes the
Management Information System (MIS), and other mechanisms for planning and control such
as the accounting department.
The value chain system of analysis encourages the firm to take a critical look at the various
activities of it. However, it is also necessary to study how the value system of the firm has
evolved over the years and why the firm has chosen to allocate its resources in a particular
manner and not in any other manner. Analysis of past resource base is done in three ways as,
study of the changes in resource base and its deployment over the past; comparison of the
performance of the firm with performance of industry; comparison with the best practice outside
the industry.
Assessment of the balance of resources
Following are the factors which need to discuss when study that aspect:
1. Whether the activities carried out by the various business units are complementary to
each other or not (Portfolio Analysis).
2. Stock of skill is well balanced or not
3. Resources are flexible and adaptable to future needs or not.

Portfolio Analysis
The BCG matrix (aka B.C.G. analysis, BCG-matrix, Boston Box, Boston Matrix, Boston
Consulting Group analysis) is a chart that had been created by Bruce Henderson for the Boston
Consulting Group in 1970 to help corporations with analyzing their business units or product
lines. This helps the company allocate resources and is used as an analytical tool in brand
marketing, product management, strategic management, and portfolio analysis.

Cash cows are units with high market share in a slow-growing industry. These units
typically generate cash in excess of the amount of cash needed to maintain the business. They
are regarded as staid and boring, in a "mature" market, and every corporation would be
thrilled to own as many as possible. They are to be "milked" continuously with as little
33

investment as possible, since such investment would be wasted in an industry with low
growth.
Dogs, or more charitably called pets, are units with low market share in a mature, slowgrowing industry. These units typically "break even", generating barely enough cash to
maintain the business's market share. Though owning a break-even unit provides the social
benefit of providing jobs and possible synergies that assist other business units, from an
accounting point of view such a unit is worthless, not generating cash for the company. They
depress a profitable company's return on assets ratio, used by many investors to judge how
well a company is being managed. Dogs, it is thought, should be sold off.
Question marks (also known as problem child) are growing rapidly and thus consume
large amounts of cash, but because they have low market shares they do not generate much
cash. The result is large net cash consumption. A question mark has the potential to gain
market share and become a star, and eventually a cash cow when the market growth slows. If
the question mark does not succeed in becoming the market leader, then after perhaps years
of cash consumption it will degenerate into a dog when the market growth declines. Question
marks must be analyzed carefully in order to determine whether they are worth the
investment required to grow market share.
Stars are units with a high market share in a fast-growing industry. The hope is
that stars become the next cash cows. Sustaining the business unit's market leadership may
require extra cash, but this is worthwhile if that's what it takes for the unit to remain a leader.
When growth slows, stars become cash cows if they have been able to maintain their
category leadership, or they move from brief stardom to dogdom.

Analysis of Balance of Skills

The skills required for managing the production, marketing, finance and the personnel should be
available in the required quantities.

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Flexibility Analysis
The resources available with the organization should be flexible enough to enable it to modify its
strategy in the face of any uncertainty.

Now we know how to analyze the activities, resources, environment, etc. which provide firms
with an idea of their areas of strength, and activities in which they can make investment.
However, it is not necessary that investment opportunities be identifies only through the methods
described in earlier sections. The idea that an investment opportunity is present in a given
situation may occur to an entrepreneur in any of the following ways as well:
1. Study of the inputs and outputs of various industries- if the input used by the industries in
any area are being transported from long distances, they can be produced locally.
2. Import substitution- Items that are now being imported, if the level of consumption is
high enough, can be produced in domestic market. Similarly, items that are in use in other
countries, but not known in the domestic market can also be produced locally.
3. Reports of studies conducted by intuitions- Financial institutions carry out studies on
various industries. Such studies also help in identifying opportunities.
4. Revival of sick industries- There are many other methods in which one can get ideas or
opportunities. Their number is limited only by the creativity of person wanting the
opportunity. It is only the person with a creative mind that can identify opportunity or
mould a situation into a opportunity for himself.
B. Generation of Project ideas
This is possible through creativity, which is the ability to combine, or synthesize the available
information and experience to generate new project ideas. The two types of creativity are:
Individual Creativity and Group Creativity.
Individual Creativity:
1. Attribute Listing (Listing of attributes attached to the final products and
designing the products based on these attributes).
2. Checklist (Checklist of questions to be prepared and trying to find solutions to
the same).
3. Black Box (Available and required inputs as well as desired outputs are listed and
an attempt is made to envision how the outputs are possible from the inputs).
4. Directed Dreaming (The problem solver tries to go to sleep while thinking of the
problems, with the hope that the subconscious will through up a solution).
Group Creativity:
1. Brainstorming (A group sitting together and go on generating solutions to the
problems on hand, welcoming improvement of ideas and synthesizing two or
more ideas).
2. Delphi (Estimates are called from a panel of experts, who are not allowed to meet
and discuss or debate each others opinions. Individual experts are asked to give
their opinions independently. A panel of coordinators reconciles after second
round of opinions and consensus).
3. Nominal Group Technique (It is a structured technique administered by a
coordinator based on the 5 steps: Silent idea generation, Round-robin

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presentation, Idea classification, Voting and ranking, and Discussion of results.

The ideas generated are ranked and the best is chosen.
Despite of all the above techniques, it is the encouragement and recognition given to creative
thinkers that will bring in the creative ideas. The environment in the organization also helps
greatly in generating new project ideas.
C. Project Screening: This is for prima facie turning down those project ideas, which do not
meet the basic criteria of preliminary appraisals. The projects are identified, primarily, on the
basis of the knowledge of the surroundings and the internal SWOT analysis. In other words,
selection and formulation of project ideas must be matched with
The promoters personality traits, resources, and returns
Prerogatives of a nation (socio-economic motifs)
Balancing the raw material crunch
Stances of the present and future market
Cost benefit analysis considering the economies of scale
Risk-return vetting
Above all, a surge for the projects does not end up merely with information procurement; instead
the think tank has to shuffle the ideas through formal and informal SWOT analysis, which out
sources a formidable strategy for new ventures.

Project Identification
The key feature of this activity is recognizing that identifying candidate projects is something
that an organization should do on a regular basis, not just once each year. Further, when
examining projects for approval, it is vital to also examine the resource capacities and
capabilities available for assignment. It is futile to assign a major new project requiring extensive
discovery of business requirements if no business analysts are available.
Project Identification precedes Project Initiation.
Process Description
Project Identification is a repeatable process for documenting, validating, ranking and approving
candidate projects within an organization.
Process Purpose
Due to the changing financial conditions within the total organization, it is necessary to establish
a stable process for approving projects for initiation. This process will
Validate the business reason for each candidate project.
Provide the base information for more informed financial commitments to projects.
Establish a more objective ranking of candidate projects.
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Allow a more effective matching of skilled resources to the right project.

Avoid over-allocating limited skilled resources.
Anticipate future human resource quantities and skills.
Provide a valid basis for staff training.
Make Project Initiation faster and more efficient.
Because priorities, finances and resources may change at any time, it is critical that this process
be well-defined and easy to follow. It is also important that its value is understood and supported
by corporate leaders and the business organization.
Use Criteria
This process is intended for proposed projects that
Are of significant size and will require a significant amount of time to complete.
Must be tightly coordinated with other active projects.
Will use new or emerging technology.
Will require a new work process.
Are intended for a new customer or unproven market.
Will impact numerous departments or organizations.
Are highly critical to the success of the business.
Are a known high risk.
This process is not intended for operational requests that may be handled directly by the IT Help
Desk or small initiatives that are routed to IT Managers for immediate scheduling and execution.
Process Flow
CERTIFY BUSINESS CASE
1. Document Business Case Evaluate all Candidate Project Information that has
been provided by the requesting organization or that has been gathered by a
technical analyst. If additional information is needed, issue an Information
Request to the requester. Format this information into a Business Case. Assign the
Candidate Project a new Project Code.
2. Review Business Case The Business Case will be examined by a screening body
with the corporate authority to accept or reject a Candidate Project. When a
Business Case is accepted, the Candidate Project is captured in a repository for
ranking and selection. If additional information is required on a Business Case,
note it as pending and issue an Information Request to the requester. If a
Business Case is rejected, send the information to the requester with an
explanation for the rejection. Remain this information in a repository.
3. Update Business Case When additional information is received on a Candidate
Project, obtain the pending Business Case from the repository and revise the data.
This Business Case should now be reconsidered by process.

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Rank Candidate Projects When requested, all Candidate Projects that are in the
repository should be objectively ranked in order of significance. The ranking criteria
should include
1. Target due dates
2. Impact on the total business
3. Impact on the technology architecture
4. Impact on other applications
5. Project size, cost and duration
6. Project risk
It will be helpful to rank projects against each of these criteria separately and then
compile a single ranking that weights each of these criteria against each other. This
ranking process is typically used to feed quarterly budget decisions but may be requested
at any time.
Evaluate Resources An updated Skills Inventory should be maintained for all corporate
(Business Unit and Information Technology Department) resources that are available for
project assignment.
Additionally, an inventory of available contract resources should also be captured. The
purpose of this Skills Inventory is to understand the true capabilities and capacities of
these resources.
Determine Resource Needs By evaluating the Skills Inventory and the Candidate
Project repository, this process will identify anticipated requirements for quantities and
capabilities of future resources. This information will provide
1. The identification of critical training needs
2. A basis for employment opportunities
3. Criteria for contract personal
This process should be reviewed on a regular basis by Resource Managers within the
organization and can be used for staff career counseling.
Approve Project
1. Select Project Based on the information provided by the ranking process, the
Core Process Owners of the business will authorize a specific project for
initiation. This project should now be removed as a Candidate Project.
2. Assign Resources Even though a project has been selected, it does not become an
active project until resources are approved and deployed against it. It is critical
to remember that when resources are assigned from the Skills Inventory, this
deployment has a proportionate impact on the resources availability. The
organization must be very careful to not over-commit limited resources in an
attempt to look more productive.

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Appendix: Example of Capital Infrastructure Project

Construction Project Management Techniques
PROJECT IDENTIFICATION AND FEASIBILITY
Project is a mission, undertaken to create a unique facility, product or service within the
specified scope, quality, time and costs. Project can also be defined as organization and
performance of resources such as men, money, machinery, materials, space and technology into
logical sequence of activities.
Most projects start with a need to have a new facility long before designers start designs and
drawing of the projects and certainly before field construction work can commence. Elements of
this phase include:
- Conceptual analysis
- Technical and feasibility studies and
- Environmental impact reports.
Here, our project is to build a cricket stadium outside a mega city over a piece of land in 16
months.
Hockey is our national game but cricket is more popular. Day by day craze for cricket is soaring
not only in old aged or middle aged people but youngsters and teenagers, boys and girlseverybody is taking keen interest to watch cricket either to watch on TV screen or at cricket
stadium.
5 Days test cricket is the oldest form of the game. So many people like to watch this sort of game
because it is said that test cricket is real test for cricketers. Due to its long time (5 days) few
people would like to go to the stadium to enjoy it.
Then came more exciting cricket called one dayers or limited overs matches. It became
popular very quickly because of its short time and more excitement and uncertainties till the last
ball of the game.
Some business minded people revolutionized the idea of shorter games viz 20T or 20-20 overs
matches. Its a real excitement. In only few overs batsmen hit lot of runs. Showering fours and
sixes tense the bowlers nerves but beat the heart throbs of the cricket lover spectators.
Commercialization of the game is also eyecatching. Now the beauty and glamour is added to the
game. Cheer leaders are the dancers (mostly beautiful girls wearing short clothes) who encourage
batsmen to hit more and more runs or bowlers to take more wickets. Indian Cricket League (ICL)
and Indian Premiere League (IPL) are new tournaments which are becoming more and more
popular.
Meanwhile technology was improving and become part of the game. Before there was only TV
and newspapers, but now we have internet. We have digital cameras with extra zoom, stump
vision cameras, speedometers to check the speed of the ball thrown by the bowlers, digital sound
systems, graphics systems, all the necessary data of the past cricket comes on the screen within a
few seconds. These all aspects strengthen the idea that cricket will live and it is part of our lives.
Stadium is to be built near the megacity. Resources will be available easily. Machinery and
manpower will be available at ease. Infrastructure facilities are there so the roads and
transportation, electricity, water, and materials will be available easily. Market is highly
competitive and we are living in the era of Advertising and marketing.
So many companies would like to sponsor matches. Lot of money can be generated through
giving rights to the television channels for broadcasting of the matches. Not only this, sponsors

39

are ready to pay money for their logos on the uniform of the cricketers. Money can be generated
through the advertising hoardings on the ground boundary. There is no doubt that
commercialization and glamour will draw more and more cricket spectators to the stadium to
watch their favorite cricketers in action as well as beautiful girls or cheer leaders.
CONCLUSION: After going through all these aspects we can conclude that building a cricket
stadium outside the megacity will be beneficial project not to the cricket lovers only but as a
profit making business also.
PROJECT DEVELOPMENT PROCESS
From conceptualization to implementation the stages in the development of construction project
(here cricket stadium) fall into broadly consistent patterns but time and degree of emphasis each
project takes on its own a unique character.
An idea of a project passes through six phases before it become a reality:
- Conceptualization
- Engineering and design
- Procurement
- Construction
- Commissioning
- Operation and maintenance
PROJECT MANAGEMENT ORGANIZATION
Generally, project management is distinguished from the general management of corporations by
the mission-oriented nature of a project. A project organization will generally be terminated
when the mission is accomplished. According to the Project Management Institute, the discipline
of project management can be defined as follows:
Project management is the art of directing and coordinating human and material resources
throughout the life of a project by using modern management techniques to achieve
predetermined objectives of scope, cost, time, quality and participation satisfaction.
By contrast, the general management of business and industrial corporations assumes a broader
outlook with greater continuity of operations. Nevertheless, there are sufficient similarities as
well as differences between the two so that modern management techniques developed for
general management may be adapted for project management.
The basic ingredients for a project management framework may be represented schematically in
Figure -1. A working knowledge of general management and familiarity with the special
knowledge domain related to the project are indispensable.
Supporting disciplines such as computer science and decision science may also play an important
role. The representation in Figure -1 reflects only the sources from which the project
management framework evolves.

40

Figure 1: Basic Ingredients in Project Management

Specifically, project management in construction encompasses a set of objectives which may be
accomplished by implementing a series of operations subject to resource constraints. There are
potential conflicts between the stated objectives with regard to scope, cost, time and quality, and
the constraints imposed on human material and financial resources. These conflicts should be
resolved at the onset of a project by making the necessary tradeoffs or creating new alternatives.
Subsequently, the functions of project management for construction generally include the
following:
1. Specification of project objectives and plans including delineation of scope, budgeting,
scheduling, setting performance requirements, and selecting project participants.
2. Maximization of efficient resource utilization through procurement of labour, materials and
equipment according to the prescribed schedule and plan.
3. Implementation of various operations through proper coordination and control of planning,
design, estimating, contracting and construction in the entire process.
4. Development of effective communications and mechanisms for resolving conflicts among the
various participants.
The Project Management Institute focuses on nine distinct areas requiring project manager
knowledge and attention:
1. Project integration management to ensure that the various project elements are effectively
coordinated.
2. Project scope management to ensure that all the work required (and only the required work) is
included.
3. Project time management to provide an effective project schedule.

41

4. Project cost management to identify needed resources and maintain budget control.
5. Project quality management to ensure functional requirements are met.
6. Project human resource management to development and effectively employ project
personnel.
7. Project communications management to ensure effective internal and external
communications.
8. Project risk management to analyze and mitigate potential risks.
9. Project procurement management to obtain necessary resources from external sources.
PROJECT PLANNING AND CONTROL
Planning is the basic function of the management. Planning is concerned with how and when to
achieve the predetermined objectives. Planning sets all other functions of management viz.
organizing, staffing, directing, motivating, coordinating etc. The main objectives of planning are
listed below:
i. Analysis
ii. Anticipation
iii. Scheduling resources
iv. Co-ordination and control
v. Production of data
All effectively managed projects involve the preparation of the project plan. This is the
Fundamental document that spells out what is to be achieved, how it is to be achieved, and what
resources will be necessary. In Projects and Trends in the 1990s and the 21st Century, author
Jolyon Hallows says, "The basic project document is the project plan. The project lives and
breathes and changes as the project progresses or fails." The basic components of the project,
according to Hallows, are laid out in the figure below.

42

"With the plan as a road map, telling us how to get from one point to another," says Hallows, " a
good project manager recognizes from the outset that a project plan is far more than an academic
exercise or tool for appeasing upper management. It is the blueprint for the entire scope of the
project, a vital document which is referred to frequently, often updated on-the-fly, and something
without which the project manager cannot proceed."
CONTROL OF PROGRESS ON SITE
Without control planning loses much of its value. It must be applied continuously to update the
plans and to enable reconsideration of the workload in the light of what has already taken place.
Control involves comparing the actual achievement with the plans. If a programme is to be really
effective as a control document, it must represent time and quantity of work carried out.
Progress can be recorded on planning charts that clearly indicate what is happening and where
corrective action needs to be taken. Weekly and monthly meetings are invaluable in helping to
control progress. The action necessary for correcting underproduction will be considered and the
best solution will then be incorporated into the programme for the next period.
PROJECT WORK BREAKDOWN work within each phase to identify the events or tasks, and
their associated subtasks. Define everything that needs to be done; this is called the work
breakdown structure.
The Work Breakdown Structure (WBS)
The WBS has become synonymous with a task list. The simplest form of WBS is the outline,
although it can also appear as a tree diagram or other chart. Sticking with the outline, the WBS
lists each task, each associated subtask, milestones, and deliverables. The WBS can be used to
plot assignments and schedules and to maintain focus on the budget.

COSTING ACTIVITY
Cost estimating is one of the most important steps in project management. A cost estimate
establishes the base line of the project cost at different stages of development of the project. A

43

cost estimate at a given stage of project development represents a prediction provided by the cost
engineer or estimator on the basis of available data. According to the American Association of
Cost Engineers, cost engineering is defined as that area of engineering practice where
engineering judgment and experience are utilized in the application of scientific principles and
techniques to the problem of cost estimation, cost control and profitability.
The costs of a constructed facility to the owner include both the initial capital cost and the
subsequent operation and maintenance costs. Each of these major cost categories consists of a
number of cost components.
The capital cost for a construction project includes the expenses related to the initial
establishment of the facility:
Land acquisition, including assembly, holding and improvement
Planning and feasibility studies
Architectural and engineering design
Construction, including materials, equipment and labor
Field supervision of construction
Construction financing
Insurance and taxes during construction
Owner's general office overhead
Equipment and furnishings not included in construction
Inspection and testing
The operation and maintenance cost in subsequent years over the project life cycle includes the
following expenses:
Land rent, if applicable
Operating staff
Labor and material for maintenance and repairs
Periodic renovations
Insurance and taxes
Financing costs
Utilities
Owner's other expenses
COST OF PROJECT:
Capacity of spectators = 80000
Time limit =16 months
Average cost of ticket =Rs.100
Per year matches = 4
Assuming One match average spectators = 60000
Earning from match tickets = Rs.100 x 60000 =Rs. 6000000
Per year earning through matches = Rs.6000000 x 4 = Rs.24000000
In 5 years earning through matches = Rs.24000000 x 5 = Rs. 120000000
Say the built up area for the stadium = 20000 Sqm
Cost of construction per Sqm = Rs.6000
Therefore, Total cost of construction = 20000 x Rs. 6000 =Rs.120000000
This cost will be covered in 5 years exactly.

44

(Note: Other income from the broadcasting rights to the TV channels, hoarding advertising, fees
from sponsors etc.will be different than this ticket income.)

The Critical Path Method

The most widely used scheduling technique is the critical path method (CPM) for scheduling,
often referred to as critical path scheduling. This method calculates the minimum completion
time for a project along with the possible start and finish times for the project activities. Indeed,
many texts and managers regard critical path scheduling as the only usable and practical
scheduling procedure. Computer programs and algorithms for critical path scheduling are widely
available and can efficiently handle projects with thousands of activities.
The critical path itself represents the set or sequence of predecessor/successor activities which
will take the longest time to complete. The duration of the critical path is the sum of the
activities' durations along the path. Thus, the critical path can be defined as the longest possible
path through the "network" of project activities, as described in Chapter 9. The duration of the
critical path represents the minimum time required to complete a project. Any delays along the
critical path would imply that additional time would be required to complete the project.
There may be more than one critical path among all the project activities, so completion of the
entire project could be delayed by delaying activities along any one of the critical paths. For
example, a project consisting of two activities performed in parallel that each requires three days
would have each activity critical for a completion in three days.
Formally, critical path scheduling assumes that a project has been divided into activities of fixed
duration and well defined predecessor relationships. A predecessor relationship implies that one
activity must come before another in the schedule. No resource constraints other than those
implied by precedence relationships are recognized in the simplest form of critical path
scheduling.
To use critical path scheduling in practice, construction planners often represent a resource
constraint by a precedence relation. A constraint is simply a restriction on the options available
to a manager, and a resource constraint is a constraint deriving from the limited availability of
some resource of equipment, material, space or labor. For example, one of two activities
requiring the same piece of equipment might be arbitrarily assumed to precede the other activity.
This artificial precedence constraint insures that the two activities requiring the same resource
will not be scheduled at the same time. Also, most critical path scheduling algorithms impose
restrictions on the generality of the activity relationships or network geometries which are used.
In essence, these restrictions imply that the construction plan can be represented by a network
plan in which activities appear as nodes in a network, as in Figure 9-6. Nodes are numbered, and
no two nodes can have the same number or designation. Two nodes are introduced to represent
the start and completion of the project itself. The actual computer representation of the project
schedule generally consists of a list of activities along with their associated durations, required
resources and predecessor activities. Graphical network representations rather than a list are
helpful for visualization of the plan and to insure that mathematical requirements are met. The
actual input of the data to a computer program may be accomplished by filling in blanks on a

45

screen menu, reading an existing datafile, or typing data directly to the program with identifiers
for the type of information being provided.
With an activity-on-branch network, dummy activities may be introduced for the purposes of
providing unique activity designations and maintaining the correct sequence of activities. A
dummy activity is assumed to have no time duration and can be graphically represented by a
dashed line in a network. Several cases in which dummy activities are useful are illustrated in
Fig. 10-1. In Fig. 10-1(a), the elimination of activity C would mean that both activities B and D
would be identified as being between nodes 1 and 3. However, if a dummy activity X is
introduced, as shown in part (b) of the figure, the unique designations for activity B (node 1 to 2)
and D (node 1 to 3) will be preserved. Furthermore, if the problem in part (a) is changed so that
activity E cannot start until both C and D are completed but that F can start after D alone is
completed, the order in the new sequence can be indicated by the addition of a dummy activity
Y, as shown in part (c). In general, dummy activities may be necessary to meet the requirements
of specific computer scheduling algorithms, but it is important to limit the number of such
dummy link insertions to the extent possible.

Many computer scheduling systems support only one network representation, either activity-onbranch or acitivity-on-node. A good project manager is familiar with either representation.

46

CONCLUSION:
This cricket stadium will be profitable for all the parties say sponsors, spectators, cricket
association etc.

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Chapter-1
Planning of Projects
End Chapter quizzes
1. Which of the following statement is true?
a. A project is an ad hoc activity of the firm.
b. A project should be viewed as the main activity of the firm.
c. A project should be viewed as something that contributes to the ability of the
organization
d. A project is a thing which contributes to the ability of the project manager.
e. None of these
2. Which of the following is a correct sequence of life cycle of a project?
a. Planning, Selection, Scheduling, Termination
b. Selection, Implementation, Scheduling, Monitoring, Termination
c. Planning, Implementation, Control, Evaluation
d. Selection, Scheduling, Implementation, Evaluation, Control
e. Planning, Implementation, Scheduling, Termination
3. Which of the following factors call for the project management?
a. Interdependencies among the activities undertaken by various departments.
b. Sharing of resources.
c. Size of task involved.
d. Both (a) and (b) above.
e. All of (a), (b) and (c) above
4. During which stage of the life cycle of a project is the level of activity highest?
a. Conception and selection.
b. Planning and scheduling.
c. Implementation, monitoring and control.
d. Evaluation.
e. Termination.

5. In which of the following situations an industry is considered to have low entry barriers?
a. When economies of scale are high
b. When wide access to channels of distribution is required
c. When there is low level of product differentiation
d. When investment outlay required is huge
e. When the buyers of the products are few
6. Which of the following might be the reasons for the failure of projects?
a. Lack of proper planning
b. Inefficiency of line manager
c. Bad choice of technology

48

d.
Both (a) and (b) above
e. All of (a), (b) and (c) above.
7. Which of the following is not considered while analyzing the business environment as per
PEST Model?
a. Foreign trade regulations
b. Disposable income levels
c. Levels of education
d. Human resource management of the firm
e. Rates of obsolescence.
8. In which of the following situations an industry is considered to have low entry barriers?
a. When economies of scale are high.
b. When wide access to channels of distribution is required.
c. When there is low level of product differentiation.
d. When investment outlay required is huge.
e. When the buyers of the products are few.
9. When there is a declining trend in the resources available, the resources allocation should be
a. Strictly based on a formula
b. Made on existing pattern
c. Allocated by free bargaining between the divisions and the center
d. Made either by imposed priorities by the center or competitive bidding
e. None of the above.
10. According to Micheal Porters Model the competitive position of a firm depends upon apart
from other factors,
a. Foreign trade regulations.
b. Monopolies legislations.
c. Money supply.
d. Bargaining power of buyers.
e. inflation.

49

Chapter-2

Analysis & Selection of Projects

S. No.

Content

Page no.

Project Design

51

Market & Demand Analysis

62

Technical Analysis

82

Plant Location And Layout

85

Financial Analysis

95

Environmental Impact Analysis

112

Project Appraisal

117

Appraisal Criteria

119

Multiple Projects and Constraints

141

10

Project Financing

143

11

Complex Investment Decision under Inflation

149

12

Social Cost Benefit Analysis (SCBA)

150

13

Detailed Project Report

153

50

Analysis & Selection of Projects

Project Design
Project design is very broad in scope and includes everything that must be determined before a
project can proceed. That is, what the project suppose to accomplish? Who will fund the project?
Who will do the project? Who will prepare the technical design, ordering of materials,
budgeting, managing, etc.
The actual process can be categorized into 3 phases:
Determining the project goal;
What are the available resources?
The detail design.
The Project Goal
The project goal is an important determinant of the form and design of the project. How well
does the proposed project goal fit into the current government policy? Vague goals often results
into bad / unsuccessful projects.
It is also important to note that there are a number of stakeholders that are interested in the
project. These stakeholders can be classed into:
the recipients;
the funding agency; and
the government
Each of them may have their own goals. A good project goal is one that can be achieved within
the first five years of the project and are acceptable to all the three stakeholders mentioned
above.
The Available Resources
All projects require resources such as money, labor, time and the natural resource (sunlight,
water, waves, wind, etc). For a project to operate successfully the designing must work within
the limits of the available resource.
Detailed Design
The detailed project designing normally commences after the goals and available resources are
determined. The following items are usually addressed in a detailed designing process:
Specific technical purpose of the project
Looking at what the project should do. For example, the project needs to provide power to
operate a video that requires 150W, 240V at 50Hz for 4 hours per week.
Who are the recipients?
This is usually determined after lengthy discussions with the appropriate authorities.
In many cases the recipients are chosen politically.
Who will administer, build, operate and maintain the project?

51

This may not be so obvious during the construction phase but after the physical completion of
the project it is important that a decision is made on who or how the project will be managed as
the sustainability of the project normally hinges on this.
The technical design of the project
Who will do the design? Who will check the design? What are the restrictions by the funding
agencies?
The equipment suppliers and labor
There has to be a process in specifying and purchasing the equipment and services.
Does the recipient need to provide any materials or labor? Are there any restrictions by the
funding agency?
Budgeting
Given the limited resources it is necessary that a budget on the available resources is developed
to guide their allocation.
The logistics of getting the equipment to the project site
What are the necessary arrangements (e.g., shipping)? Where will the equipment be stored? Will
there be a need to test the equipment when received?
Ownership of the project
It is important that the owners of the equipment are made known to the respective stakeholders.
This will avoid the recipients using the equipment as they please.
Land issues
Obtaining land for project sites, to gain access to project sites, cutting of trees, etc are just some
of the land related issues that have to be dealt with care. Ignoring the rights of landowners may
cause problems later on during the operation of the project.
User Education
It may not be possible to educate the users of the system in detail. However, it is imperative that
the users understand the limitations of the system, when is power available, etc. Many failures
are due to the abuse of the system by the users.
Core concepts underlying the logical framework are summarized as follows:
The logical framework presents the key elements of a development intervention and their
interrelationships. The intervention is usually termed a project or a program.
The framework clearly identifies the impacts or objectives the project or program will achieve.
It also allocates measurable and/or tangible performance targets to them.
The framework also clearly identifies the inputs and outputs the project or program will deliver
to enable achievement of the proposed objectives.
Thus, the framework presents a cause and effect matrix where inputs lead to outputs and
outputs lead to immediate objectives, which in turn lead to longer-term objectives.

52

This cause-effect sequence is drawn substantially from the cause-effect analysis and related
objectives tree described in the previous section. The alternatives analysis facilitates the choice
of the cause-effect strand(s) that will make up the project intervention.
Making the cause-effect relationships between the basic elements of the projects design more
explicit adds confidence that the project is realistic, implementable, monitorable, and capable of
delivering the set objectives.
Key Elements of a Logical Framework
There is a clear distinction between the logical framework process and the logical framework
matrix. The process refers to the steps involved in planning and designing the project. These
steps invariably include a situation analysis, stakeholder analysis, cause-effect analysis,
objectives analysis, and alternatives analysis culminating in the design of the project. The matrix,
which summarizes the final design of the project, usually comprises 16 frames organized under 4
major headings.

53

The Design Summary provides information on the basic building blocks of the project and
presents them as a cause-effect chain drawn from a preceding cause-effect analysis. The inputs
are expected to result in the outputs, which in turn are expected to achieve the immediate
objective (sometimes called the purpose) of the project which contributes to the longer term
objectives (sometimes called the goals of the project.)
Some logical frameworks include the category of Activities. This refers to the detailed and
chronological tasks, which will use inputs and deliver outputs.
If the logical framework is to be used as a detailed planning and implementation guide, the
inclusion of Activities is necessary. If the logical framework is used to reflect a succinct logical
presentation of the critical elements of a project or program, the inclusion of Activities is not
essential.
The Verifiable Performance Targets tie down performance requirements for each element of
the project design. These are specific tangible and/or quantifiable measures of achievement for
each level in the design summary. These indicators are important in both monitoring and
assessing success.
The Monitoring Mechanisms are the sources and/or methods, which will be used to collect data
for monitoring performance at each level of the cause- effect chain in the design summary. These
must be specified because they often require resources and commitment from the project
implementors.
The Assumptions and Risks identify other conditions, which are external to the project but are
needed to ensure that one level indeed causes the next level of performance to happen. Thus,
given the level of inputs, outputs will be produced assuming project staff have the required
technical skills (assumptions) -and outputs will give us the expected impacts - assuming no
major natural disaster takes place (risks).
Designing a Project using the Logical Framework
Identifying the Projects Purpose and Goals
The Design Summary comprises four basic levels of a cause-effect chain. At the top are the
project goals (the long-term objectives of the project). While these provide the umbrella logic
54

and rationale for the project, they will only come on stream over the long term and are influenced
by many variables in the interim.
The project purpose (the immediate objective of the project) is the key anchor of the project
design. This is the level of achievement that the project must deliver. This objective should
become evident by the end of the project implementation period. A projects scope and outputs
will be designed around this objective to specifically ensure that it is achieved by the end of the
project. It is therefore advisable to have only one immediate objective for the project.
Therefore, the starting point for preparing the logical framework must always be the immediate
project objective or purpose In other words, we must first identify the central problem (or
opportunity) and the immediate desired impact as precisely as possible. We must also specify the
verifiable performance targets that we expect the project to deliver by the time it is complete.
These should normally be predictable.
Thus, we begin with the design summary column, specifically the frame pertaining to the
project purpose (i.e. the immediate objective). The related frames under the performance targets
and the monitoring mechanisms are also completed in parallel. This is essential because the
performance target/s forces the project designer to specify the immediate project objective and
hence the expected immediate impact of the project. This must be done in tangible, measurable,
and monitorable terms, ensuring that the designer also becomes clearly aware of what he or she
wants the project to deliver. Note that there is only one immediate objective specified for the
project.
The next step is to clarify the project goals (longer-term objectives) sought by the project.
These are usually subsector or sector goals, but sometimes national goals are specified.
Examples of goals include increased productivity, increased incomes, poverty reduction, and
employment creation. In specifying the goals the cause-effect linkage between the purpose and
the goal must be realistic.
Design Summary Performance Targets Monitoring Mechanisms Assumptions & Risks
The project purpose and project goals are written differently.
(a) While there may be more than one long-term objective or goal, there is usually only one main
and primary immediate objective for each project. If there are to be more than one, this implies
there are a number of subprojects under the umbrella of a more generalized project. This issue
will be dealt with in the discussion on outputs and the implications of having more than one
immediate project objective.
(b) While the immediate project objective is always tied down with a tangible and/or measurable
performance target, this is not always necessary for the longer term objectives because the longer
term objectives:
are expected at a much wider scope (e.g., the sector);
will accrue at a much later date (perhaps 5-10 years down stream); and
will be influenced by many factors other than this project.
Thus, establishing very specific long-term targets to be achieved by this project is not always
realistic.

55

In defining the goals, several effects at various levels should be considered.

Looking at the transport example, the next immediate effects of smooth traffic flows are fuel
conservation, time saving, reduced pollution, and longer life for vehicles.
Higher level effects are increased current account, increased productivity, improved quality of
life, and reduced costs. There are also effects in between these two levels. Which of these
effect(s) should be the long term objectives or goals of the project? How is this decision made?
The principles to be observed in selecting these goals should include the following:
There should be a direct cause-effect relationship with the purpose.
The purpose should make a reasonably significant contribution to the goal(s).
If more than one goal is specified, there could be possible cause effect relationships between
them which the designer should be aware of.
By way of illustration, the highest order objectives in our example increased current account
and productivity - are considered too removed from reduced traffic congestion. Far too many
other effects and external influences would intervene between reducing traffic and achieving
these goals. Also, the project focuses only on one city.
The scope of the likely effects at a national level is therefore even further limited. Several more
immediate goals remain to be chosen. Which of the remaining ones are more important as likely
follow-on effects of a reduction in traffic congestion? The two obvious ones are time saving and
fuel conserved.
Both can be readily measured, directly or indirectly, by traffic volume and traffic speed data.
Reduced pollution could also be an obvious objective for a government. However, how
significant is vehicle pollution to the overall pollution levels in the city? Given these high levels,
perhaps one should also consider reduced pollution as a goal. It can be regularly measured and
has important follow-on effects. Longer life for vehicles is not adopted as a goal, largely because
of the difficulties in its measurement and the many factors that contribute to vehicle
deterioration.
Thus, at this stage of our design, we have three acceptable goals
reduced pollution,
fuel conservation, and
saved travel time.
Various types of physical or tangible goods and services may be financed and delivered by the
project. The guiding principle should be that the outputs must provide the conditions necessary
to achieve the immediate project objective.
This cause-effect relationship between the projects outputs as a package and the envisaged
objective is central to project design. This cause-effect hypothesis must be checked and verified
because this is the basis on which investment will be made available to the project.
Project outputs potentially fall within the following categories:
(a) Infrastructure Outputs: These are the typical physical deliverables of projects and can range
from a road to an energy plant, from schools and curricula for childrens education to a water
56

supply system. They are usually physical deliverables necessary for achieving envisaged
impacts.
(b) Service-type Outputs: These are outputs which may or may not accompany infrastructure
support. They include services such as health care, agriculture extension programs, and research
into new products or systems of operation.
(c) Policy-type Outputs: The policy and legal framework within a sector is critical to the
effective and efficient functioning of that sector. The infrastructure or strengthened services
provided by the project may often be ineffectual at delivering envisaged impacts unless
supporting changes are made in sector policy.
Accordingly, a project may assume the responsibility for adjusting the policy or legal framework
through the introduction of new policies or the strengthening of the legal framework to support
delivery of sector impacts.
(d) Institutional Strengthening-type Outputs: These types of outputs can range from institutional
diagnostic studies to the revision of operating strategies, the introduction of new operating
systems, the upgrading of operating standards, the enhancement of staff skills, etc. Such
strengthening is often necessary not just for the effective delivery of infrastructure and service
outputs described above, but also for sustaining their functioning long after project completion.
In a typical project, the infrastructure, services, policy, and institutional strengthening outputs
must complement each other.
Returning to the transportation example, there appear to be various possible options to reducing
traffic congestion. The road infrastructure option (which involves a widening of the main
arterials) is assessed as the least effective option to reducing congestion by the alternatives
analysis, and is therefore not included as an output. Road infrastructure can be a large
expenditure item; the level of finance available is an important criterion for eliminating the
infrastructure option. Ensuring effective maintenance of vehicles is logistically unrealistic. Thus,
the viable options considered are: (i) improving the signal system; (ii) automating traffic
monitoring; (iii) a new policy on vehicle restriction; (iv) improved enforcement; and (v) staff
training.
When outputs are described in a design summary their performance targets and monitoring
mechanisms should also be identified.
In summary, the projects objective provides a rationale and purpose, (why the project is being
done). The projects outputs describe the physical and/or tangible deliverables, which will
occupy all of the energies of the project implementors over a stated period. While the project
outputs are the most visible component of project design, they should never become the primary
preoccupation of the project. This must always remain the projects intended objectives. Thus,
even during implementation, project staff have to continually remind themselves of the reason
for the project and verify whether the envisaged linkage between the projects outputs and its
objectives remain valid.
Inputs generally fall within four main categories:
consultants to plan and support implementation included in this are costs associated with
required surveys, detailed design and technical advice;
equipment and software plus related staff training;
civil works; and
local salaries and project management.

57

Further subcategories of inputs can be developed as required. In the logical framework coverage
of costs is only provided in a summarized manner. Detailed cost tables are available separately.
Similarly, the logical framework need not cover any information on activities.
Detailed activity and implementation charts (GANTT charts or PERT/CPM drawings) are
available with project documentation. The most important purpose of the logical framework is to
summarize the key elements of the projects design rather than present self-contained and
comprehensive project information.
Assumptions
Having determined the inputs, outputs, purpose, and goals of the project, one has in fact
specified the hypotheses for the success of the project. All hypotheses have assumptions and
risks. The task now is to define the specific assumptions and risks underlying the proposed
project design.
Assumptions are factors, which are outside the control of the project but which nevertheless
influence the cause-effect relationships integral to project design.
The achievement of the projects purpose will indeed result in the achievement of its goals if
certain external factors/conditions exist. These are the assumptions.
From another point of view they are the projects risks. If these conditions, which are usually not
within the control of the project, are not present, the projects objectives may be difficult to
achieve.
The concept of assumptions applies at all levels of the project design summary. The achievement
of the projects outputs will result in the achievement of its purpose only if the external
assumptions prevail. Similarly, the project inputs will translate into the projects outputs only if
certain other conditions exist.
Such external factors may range from the level and timeliness of rainfall needed for crop
production to the political support required to pursue and implement a policy reform program.
Typical areas in which assumptions influence the outcomes of projects include:
market conditions/prices
macroeconomic policies/conditions
political and social conditions
sector policies and conditions
environmental conditions
private sector capability
government administrative capability
community/NGO support
counterpart funding.
Assumptions can also be written as risk statements. For example, a new seed variety distributed
by a project (output) will result in increased crop production (immediate impact) on the
assumption that the monsoon rain will be timely and adequate.
If this assumption is worded as a risk it would be formulated as follows:
If monsoon rain does not come on time and in adequate quantities, then crop production will not
increase as expected.

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When looking at assumptions as risks we must always consider both facets of the risk: its
probability (if) as well as the seriousness of its consequence (then) if it occurs. Only risks and
assumptions, which may adversely influence the project, need to be considered.
Options for dealing with Assumptions
Do nothing: This is certainly one option. It is probably the best option if none of the assumptions
and risks are serious enough to endanger the achievement of the projects objectives.
Change the project design: Sometimes the easiest way of dealing with an assumption or risk is to
go back to the project design and add outputs and/or inputs to address the assumption or risk. For
instance, the important hypothesis that inputs will result in outputs assumes the capability of the
executing agency to use the inputs efficiently and effectively. If the agency does not have full
capability to do so, it would be wise to add an institutional capacity building component to the
project to address this risk.
Add a new project: This sometimes becomes necessary. For instance, an assumption in achieving
increased rice production is that sufficient rain will fall.
If the seasonal fluctuation seems too high, it may be necessary to initiate a parallel program to
provide for additional water resources as a contingency resource to bridge short periods of
drought.
Abandon the project: Sometimes, when the risk is too great and the preventive or contingency
measures too expensive or difficult to undertake, the wisest course of action is to abandon the
project.
Verifiable Performance Indicators: The Link between Project Design and Project
Implementation
Using Performance Indicators to Specify Performance
Verifiable performance indicators (VPIs) are measures used to establish the accomplishment of
inputs, outputs, purpose, and goal(s) of a project. VPIs indicate in specific, measurable, and/or
tangible (and therefore monitorable) terms the performance to be achieved at each level in
project design. In effect, they clarify the minimum achievement requirement for inputs to cause
the outputs and for the outputs to cause the envisaged impacts.
VPIs should also be used to specify and monitor the risks/assumptions and the extent to which
these hold true or change during project implementation.
When identifying and specifying VPIs remember: if we can measure it, we can manage it. Thus,
in defining VPIs for a project, designers are forced to clarify what various objective-type
statements used to describe the outputs and impacts of the project mean. VPIs help to remove
vague and imprecise statements about what can be expected from our project interventions.
VPIs should measure results, not just processes, and if possible they should identify these results
in terms of all of the following dimensions:
the expected quantities to be achieved;
the expected quality standards to be achieved;

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 the time period over which the quantitative and qualitative achievements will occur; and
the location/area of achievement.
Thus, each indicator must specify a target in terms of quantity, quality, time, and location (if
relevant).
For the indicator to measure change it must have a baseline as a reference point. This is usually
current performance of the entity and/or of a comparator at the beginning of a project.
Performance during project implementation is measured against the target, taking into account
the baseline as well as expected improvements above it.
Keep the number of indicators to the minimum. Use only those performance indicators that are
needed to determine whether the objective is accomplished.
Performance indicators should always be developed at the same time as the specification of the
project design summary, viz, the projects goals, purpose, outputs, and inputs. The performance
indicators and related targets test the realism of the projects design at each level.
Goal(s)
Performance indicators at this level are the long-term impacts expected from the project, and in
this sense they are not project specific. Rather, at this level they are program, subsector, or sector
objectives to which this particular and several other projects will contribute.
Ensure that the projects goals and related performance indicators or targets are realistic. The
project should have reasonable potential in contributing to the achievement of its goals, though
this may be only in the longer term.
Purpose
Performance indicators and related project targets at this level are most crucial and can
sometimes be difficult to determine. They are the performance targets for which the project takes
full accountability to deliver. They are the performance measures by which the project will be
judged a success or failure.
The purpose or end-of-project impact defines the projects immediate impact on beneficiaries or
institutions and related changes in the behavior of project beneficiaries and institutional
functioning.
In the transportation example, the immediate purpose or objective of the project must be:
reduced traffic congestion. Thus the performance indicator and related target is specified as:
average traffic speed on major arterial roads is increased from 12 km/hr in 1998 to 25 km/hr in
2003.
The purpose should be stated as simply as possible to ensure its feasible achievement and ease of
monitoring. This is not to say that we should simplify the objective so that it can be easily
achieved. The achievement of the purpose depends on the successful achievement of the various
outputs. Thus the outputs will be defined in relation to the purpose level objective and related
indicators.
Outputs
The outputs are usually the easiest to specify in terms of performance indicators and targets,
because outputs are the tangible goods and services to be delivered by the project. All outputs
have to be accomplished by the end of the projects implementation period.

60

Inputs
These are the resources available for project implementation. Inputs are usually money (budget);
equipment; technology; and human resource expertise. Performance indicators and targets may
be altered after they have been established. Adjustments are possible and sometimes advisable
during implementation to accommodate changes in the circumstances of the project. Changes
may also be necessary due to deficiencies in data availability on the performance indicator.
Therefore, indicators and targets should be periodically re-examined and refined if necessary to
provide the most up-to-date measure of the projects performance.
Using Performance Indicators to Manage, Monitor and Evaluate Performance
VPIs provide a basis for monitoring and evaluating the project. To serve this function,
performance indicators must be integrated into the management information system of the
project and/or of the institution or executing agency.
The monitoring mechanisms are the data sources and reporting systems that will be used to
verify the status of each indicator. They will show what is accomplished with respect to inputs,
outputs, purpose, and goals of the project.
The monitoring mechanisms and the information system will provide the evidence that the
objectives have been achieved.
The indicator and the monitoring mechanism must be determined together to ensure that the
monitoring mechanisms and information systems are practical and cost-effective.
In determining the monitoring mechanism for a particular performance indicator it is necessary
to consider the following:
Is the data available from normal sources?
How reliable is the data?
Is the data available on a timely basis?
If special data has to be collected, what will it cost?
Definitions of performance indicators should be realistic, practical, and precise. The data
collection effort should be cost-effective in meeting the needs of various decision-makers.
Moreover, the need for data collection, using existing sources of information, has to be matched
by the capability of the various agencies that would generate and report the information. Also,
those who use it for decision-making should assess the need, comprehensiveness, and value of
data. If an indicator cannot be verified, then another indicator should be found.
Monitoring Assumptions
Monitoring assumptions is critical to project success. The environment is continually influencing
the cause-effect hypotheses on which the project is built. Project implementors must ensure that
such hypotheses continue to remain valid.
Monitoring should be built into the projects performance monitoring and management system.
The projects performance indicators should be regularly monitored, and the assumptions on
which they are built should be frequently checked and verified.

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Market & Demand Analysis

Success of any project depends on the demand for the output produced by it. Either project
should meet the current demand or it should create a demand and then meet that demand.
There are various aspects of a market that should be analyzed to know the actual condition of
market.
Identification of Market: Study of market involves a detailed analysis of following factors:
Target Market refers to the Potential (forecast of) Demand for a product or service.
Forecast refers to the inference of what is likely to happen in future. Demand is the
quantity of a good /service which buyers are willing to purchase/avail during a particular
period and for a particular market environment (e.g. price of a good, price of its
substitutes, complementary, incomes, tastes, preferences, etc.). Forecast of demand is
required both for planning and controlling.
To identify a particular segment of the market based on its structure (income/age groups,
industries/geographical distribution/exports, etc.)
To identify the nature of demand (monsoons, disposable income, prices, fashion, etc.)
Marketing Strategy: Next step is to decide the marketing strategy to be follow. For that
following aspects have to be considered:
Distribution Channels- with keeping a view on channel used by competitor and their
efficacy and try to identify any new innovative channel.
Advertisement and Publicity- when, where and how to advertise for the optimum
utilization funds.
Brand Image or Brand Name- analyzing as whether the introduction of that product
harm the image of company.
After Sales Service- nature and frequency of after sales services to support the
product.
Conducting Market Study:
For conducting Market Survey, Collection and Classification of Data is required. It can be done
with Primary Data (Data collected solely for a particular purpose by the user) and Secondary
Data (Data collected already by somebody is being used). There are various steps to study the in
conducting a market study with primary data.
A. Market Research with Primary Data:
1. Statement of Objectives- It is always necessary to clearly state the output required from
the study in precise terms before starting the process of data collected. Lack of clarity
will lead to collection of irrelevant data, wastage of time, money and efforts.
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2. Specification of Data Requirements- Data requirement depends on the objectives.

3. Design of Sample- In some cases it is desirable to collect data from each and every
consumer in the target market. But at times it is required to take data only from the
sample of population. There are various techniques exist for sampling of population.
4. Mode of Collecting Data- Data collection can be done by various methods. Some types of
data required observation while some other type of data requires direct or indirect
interactions.
5. Conducting Survey and Obtaining Data- Survey can be conducted using any medium as
mail, or personal interviews, focus group, etc. but survey conducted using mail having a
common problem of non-response error which can be eliminated by considering
additional respondents.
6.
Analysis and Conclusion- The collected data should be edited to eliminate wrong and
dishonest responses. At this stage it is required to look out other factors also which were
ignored earlier.
Advantages of Primary Data: There are following advantages to primary data
High accuracy
Easy analysis
Problems in collecting Primary Data:

Sacrificing accuracy to reduce costs

Less reliability if opinion rather than fact is collected
Poor understanding of respondents
If confidential information is asked, less reliable information may be forthcoming
Respondents may find difficult to answer questions

B. Market Research with Secondary Data: Secondary data can be obtained from two basic types
of sources: internal and external.
Internal: The past record of an organization offer substantial information. The information
relating to the trends in sales of organization can be used to get an idea about the market
condition. Primary information collected earlier for some other purpose may also sometimes
prove to be useful.
External: Data can be obtained from external sources also, as:
Market Research organizations like MARG (Market Analysis and Research Group),
CMIE (Center for Monitoring Indian Economy) offer adequate data in their standard or
customized reports.
Trade associations like FICCI (Federation of Indian Chambers of Commerce and
Industry) and other industry associations provide lot of data related to the industry.
Government Research Organizations like CSO (Central Statistical Organization), RBI
and Central Govt. publish a lot of data on economy.
Advantages of Secondary Data:

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Easy availability and saving of time

Easy to collect
Data collected by professional bodies is more accurate
Disadvantages of Secondary Data:
User specific organizations are charged highly by Research Organizations
No direct check on quality of data collected
Plans of user to enter into a specific area may not remain confidential.
Categories of Forecasting Models:
A. Time Series Projection Models: (i) Simple Moving Average, and (ii) Weighted Moving
Average (iii) Exponential Smoothing.
B. Cause and Effect Models: (i) Simple Regression, (ii) Multiple Regression, (iii) Chain
Ratio Method, (iv) End Use Method, (v) Econometric Method, and (vi) Consumption Level
Method (a. Income Elasticity of Demand Method; b. Price Elasticity of Demand Method).
C. Qualitative Models: (i) Field Sales Force Method, (ii) Users Expectation Method, (iii)
Delphi Method, and (iv) Jury of Executive Opinion Method
A. Time Series Projection Models:
Arrangement of statistical data in chronological order ie., in accordance with occurrence of time,
is known as Time Series. Such series have a unique important place in the field of Economic
Business statistics. A business man is interested in finding out his likely sales in the near future,
so that the businessman could adjust his production accordingly and avoid the possibility of
inadequate production to meet the demand. In this connection one usually deal with statistical
data, which are collected, observed or recorded at successive intervals of time. Such data are
generally referred to as time series.
According to Mooris Hamburg A time series is a set of statistical observations arranged in
chronological order Ya-Lun- chou defining the time series as A time series may be defined as
a collection of readings belonging to different time periods, of some economic variable or
composite of variables. A time series is a set of observations of a variable usually at equal
intervals of time. Here time may be yearly, monthly, weekly, daily or even hourly usually at
equal intervals of time.
The Primary purpose of the analysis of time series is to discover and measure all types of
variations which characterize a time series. The central objective is to decompose the various
elements present in a time series and to use them in business decision making.
Components of Time series:
The components of a time series are the various elements which can be segregated from the
observed data. The following are the broad classification of these components.

64

In time series analysis, it is assumed that there is a multiplicative relationship between these four
components.
Symbolically,
Y=T+ + +
Where Y denotes the result of the four elements; T = Trend; S = Seasonal component; C =
Cyclical components; I = Irregular component
In the multiplicative model it is assumed that the four components are due to different causes but
they are not necessarily independent and they can affect one another. Another approach is to treat
each observation of a time series as the sum of these four components. Symbolically
Y = T + S+ C+ I
The additive model assumes that all the components of the time series are independent of one
another.
1) Secular Trend or Long - Term movement or simply Trend
2) Seasonal Variation
3) Cyclical Variations
4) Irregular or erratic or random movements (fluctuations)
Secular Trend:
It is a long term movement in Time series. The general tendency of the time series is to increase
or decrease or stagnate during a long period of time is called the secular trend or simply trend.
Methods of Measuring Trend:
Trend is measured by the following mathematical methods.
1. Graphical method
2. Method of Semi-averages
3. Method of moving averages
4. Method of Least Squares
Graphical Method:
This is the easiest and simplest method of measuring trend. In this method, given data must be
plotted on the graph, taking time on the horizontal axis and values on the vertical axis. Draw a
smooth curve which will show the direction of the trend. While fitting a trend line the following
important points should be noted to get a perfect trend line.
(i) The curve should be smooth.
(ii) As far as possible there must be equal number of points above and below the trend line.
(iii) The sum of the squares of the vertical deviations from the trend should be as small as
possible.
(iv)If there are cycles, equal number of cycles should be above or below the trend line.
(v) In case of cyclical data, the area of the cycles above and below should be nearly equal.

65

Example:
Fit a trend line to the following data by graphical method.
Year
1996 1997 1998 1999 2000 2001 2002
Sales (in Rs 000) 60
72
75
65
80
85
95

Solution:

The dotted lines refers trend line

Merits:
1. It is the simplest and easiest method. It saves time and labour.
2. It can be used to describe all kinds of trends.
3. This can be used widely in application.
4. It helps to understand the character of time series and to select appropriate trend.
Demerits:
1. It is highly subjective. Different trend curves will be obtained by different persons for the
same set of data.
2. It is dangerous to use freehand trend for forecasting purposes.
3. It does not enable us to measure trend in precise quantitative terms.
Method of semi averages:
In this method, the given data is divided into two parts, preferably with the same number of
years. For example, if we are given data from 1981 to 1998 i.e., over a period of 18 years, the
two equal parts will be first nine years, i.e., 1981 to 1989 and from 1990 to 1998. In case of odd
number of years like 5,7,9,11 etc, two equal parts can be made simply by omitting the middle
year. For example, if the data are given for 7 years from 1991 to 1997, the two equal parts would
be from 1991 to 1993 and from 1995 to 1997, the middle year 1994 will be omitted.
After the data have been divided into two parts, an average of each part is obtained. Thus we get
two points. Each point is plotted at the mid-point of the class interval covered by respective part
and then the two points are joined by a straight line which gives us the required trend line. The
line can be extended downwards and upwards to get intermediate values or to predict future
values.

66

Example:
Draw a trend line by the method of semi-averages.
Year
1991 1992 1993 1994 1995 1996
Sales Rs in (1000) 60 75 81 110 106 117
Solution:
Divide the two parts by taking 3 values in each part.

Difference in middle periods = 1995 1992 = 3 years

Difference in semi averages = 111 72 = 39
Annual increase in trend = 39/3 = 13
Trend of 1991 = Trend of 1992 -13
= 72-13 = 59
Trend of 1993 = Trend of 1992 +13
= 72 + 13 = 85
Similarly, we can find all the values
The following graph will show clearly the trend line.

Merits:
1. It is simple and easy to calculate
2. By this method every one getting same trend line.
3. Since the line can be extended in both ways, we can find the later and earlier estimates.
Demerits:
1. This method assumes the presence of linear trend to the values of time series which may not
exist.
2. The trend values and the predicted values obtained by this method are not very reliable.

67

Method of Moving Averages:

This method is very simple. It is based on Arithmetic mean. Theses means are calculated from
overlapping groups of successive time series data. Each moving average is based on value
covering a fixed time interval, called period of moving average and is shown against the center
of the interval. The method of odd period of moving average is as follows. The moving averages
for three years is (a+b+c)/3, (b+c+d)/3, (c+d+e)/3, etc. Formula for five yearly moving average is
(a+b+c+d+e)/5, (b+c+d+e+f)/5, (c+d+e+f+g)/5, etc.
Steps for calculating odd number of years are following:
1. Find the value of three years total, place the value against the second year.
2. Leave the first value and add the next three years value (ie 2nd, 3rd and 4th years value) and=
put it against 3rd year.
3. Continue this process until the last years value taken.
4. Each total is divided by three and placed in the next column.
Example:
Calculate the three yearly averages of the following data.
Year
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984
Production in (tones)
50
36
43
45
39
38
33
42
41
34
Solution:

Even Period of Moving Averages:

The middle period of each set of values lies between the two time points in case of even moving
period. So we must center the moving averages.
The steps are
1. Find the total for first 4 years and place it against the middle of the 2nd and 3rd year in the
third column.

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2. Leave the first year value, and find the total of next four-year and place it between the 3rd and
4th year.
3. Continue this process until the last value is taken.
4. Next, compute the total of the first two four year totals and place it against the 3rd year in the
fourth column.
5. Leave the first four years total and find the total of the next two four years totals and place it
against the fourth year.
6. This process is continued till the last two four years total is taken into account.
7. Divide this total by 8 (Since it is the total of 8 years) and put it in the fifth column.
These are the trend values.
Example: The production of Tea in India is given as follows. Calculate the Four-yearly moving
averages
Year
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Production (tones) 464 515 518 467 502
540 557
571 586 612
Solution:

Merits:
1. The method is simple to understand and easy to adopt as compared to other methods.
2. Method is flexible as mere addition of more figures to the data will not change the entire
calculation. That will produce only some more trend values.
3. Regular cyclical variations can be completely eliminated by a period of moving average equal
to the period of cycles.
4. It is particularly effective if the trend of a series is very irregular.

69

Demerits:
1. It cannot be used for forecasting or predicting future trend, which is the main objective of
trend analysis.
2. The choice of the period of moving average is sometimes subjective.
3. Moving averages are generally affected by extreme values of items.
4. It cannot eliminate irregular variations completely.
Method of Least Square:
This method is widely used. It plays an important role in finding the trend values of economic
and business time series. It helps for forecasting and predicting the future values. The trend line
by this method is called the line of best fit.
The equation of the trend line is y = a + bx, where the constants a and b are to be estimated so as
to minimize the sum of the squares of the difference between the given values of y and the
estimate values of y by using the equation. The constants can be obtained by solving two normal
equations.
y = na + bx . (1)
xy = ax + bx2 (2)
Here x represent time point and y are observed values. n is the number of pair- values.
When odd numbers of years are given
Step 1: Writing given years in column 1 and the corresponding sales or production etc in column
2.
Step 2: Write in column 3 start with 0, 1, 2 .. against column 1 and denote it as X
Step 3: Take the middle value of X as A
Step 4: Find the deviations u = X - A and write in column 4
Step 5: Find u2 values and write in column 5.
Step 6: Column 6 gives the product uy
Now the normal equations become
y = na + bu
where u = X-A
uy = au + bu2
Since u = 0, From above equation
a = y/n
uy = bu2
b =y/u2
y = a + bu = a + b (X - A)

Example:
Fit a straight line trend by the method of least squares for the following data.
Year
1983 1984 1985 1986 1987 1988
Sales (Rs. in lakhs) 3
8
7
9
11 14
Also estimate the sales for the year 1991

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Solution:

u = (X-A)/(1/ 2)
= 2 (X -2.5) = 2XThe straight line equation is
y = a + bX = a + bu
The normal equations are
y = na .(1)
uy = bu2 (2)
From (1) 52 = 6a
a = 52/6
= 8.67
From (2) 66 = 70 b
b = 66/70
= 0.94
The fitted straight line equation is
y = a+bu
y = 8.67+0.94(2X-5)
y = 8.67 + 1.88X - 4.7
y = 3.97 + 1.88X
The trend values are
Put X = 0, y = 3.97 X = 1, y = 5.85
X = 2, y = 7.73
X = 3, y = 9.61
X = 4, y = 11.49
X = 5, y = 13.37
The estimated sale for the year 1991 is; put X = x 1983
= 1991 1983 = 8
y = 3.97 + 1.88 8
= 19.01 lakhs
The following graph will show clearly the trend line.

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Merits:
1. Since it is a mathematical method, it is not subjective so it eliminates personal bias of the
investigator.
2. By this method we can estimate the future values. As well as intermediate values of the time
series.
3. By this method we can find all the trend values.
Demerits:
1. It is a difficult method. Addition of new observations makes recalculations.
2. Assumption of straight line may sometimes be misleading since economics and business time
series are not linear.
3. It ignores cyclical, seasonal and irregular fluctuations.
4. The trend can estimate only for immediate future and not for distant future.
Seasonal Variations:
Seasonal Variations are fluctuations within a year during the season. The factors that cause
seasonal variation are
i) Climate and weather condition.
ii) Customs and traditional habits.
Measurement of seasonal variation:
The following are some of the methods more popularly used for measuring the seasonal
variations.
1. Method of simple averages.
2. Ratio to trend method.
3. Ratio to moving average method.
4. Link relative method
Method of simple averages
The steps for calculations:
i) Arrange the data season wise
ii) Compute the average for each season.
iii) Calculate the grand average, which is the average of seasonal averages.
iv) Obtain the seasonal indices by expressing each season as percentage of Grand average
The total of these indices would be 100n where n is the number of seasons in the year.

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Example :
Find the seasonal variations by simple average method for the data given below.

Solution:

Grand average = (47.

=224/4 = 56
Seasonal Index for I quarter = (First quarterly Average/ Grand Average) *
Seasonal Index for II quarter = (Second quarterly Average/Grand Average) *
100 = 113.6
Seasonal Index for III quarter = (Third quarterly Average/Grand Average)*
Seasonal Index for IV quarter = (Fourth quarterly Average/Grand Average)*
= (54/56) *100 = 96.4
Cyclical variations:
The term cycle refers to the recurrent variations in time series that extend over longer period of
time, usually two or more years. Most of the time series relating to economic and business show
some kind of cyclic variation. A business cycle consists of the recurrence of the up and down
movement of business activity. It is a four-phase cycle namely.
1. Prosperity
2. Decline
3. Depression
4. Recovery
Each phase changes gradually into the following phase. The following diagram illustrates a
business cycle.

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The study of cyclical variation is extremely useful in framing suitable policies for stabilizing the
level of business activities. Businessmen can take timely steps in maintaining business during
booms and depression.

Irregular variation:
Irregular variations are also called erratic. These variations are not regular and which do not
repeat in a definite pattern. These variations are caused by war, earthquakes, strikes flood,
revolution etc. This variation is short-term one, but it affects all the components of series. There
are no statistical techniques for measuring or isolating erratic fluctuation. Therefore the residual
that remains after eliminating systematic components is taken as representing irregular
variations.
1. Simple Moving Average (SMA)
In this model, a simple average of a pre-determined number of past periods is used as
the forecast for the next period. The average of past period is intended to even out (or
smoothen) the random changes. The time periods over which the averages should be
calculated depends on the magnitude of variation. It is a time period using data points
averaged and weighted equally.
t
SMAt+1 = ----- Ai
where,
i =t+1-n
SMAt+1 = SMA at end of time period t or forecast for time t
n = No. of periods included
Ai = Actual demand in time t
2. Weighted Moving Average (WMA)
Averaged points are weighted by giving more weightage to most recent data.

t
WMAt+1 = CiAi
where
i =1
WMAt+1 = WMA at end of time period t or forecast for time t

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Ci = % weightages given
Ai = Actual demand in time t
0 Ct 1 and Ct = 1, t = 1 to n

3. Exponential Smoothing (ES): In this, recent data points are weighted more, with weights
declining exponentially as data becomes older. In this method, a series of weights that decay
exponentially by (1-), where = the smoothing coefficient, are assigned to past data. As the data
gets older, demand for most recent period is weighted most heavily and weights placed on
successively older periods decrease exponentially.
First Order ES:
Ft+1 = Dt + (1-) Ft,
Where,

= Time period

Dt = Actual demand for current period

Ft = Forecast demand for current period
Ft+1 = Forecast for ext period
And 0 1
(Note: Initial forecasts are made by other methods like SMA).
Adjusted Exponential Smoothing (AFt+1):
AFt+1 = Ft+1+Tt+1, where,
Ft+1= Forecast without adjustment
Tt+1 = Adjustment Factor (for seasonal trend)

B. Cause and Effect Models

These models are used when there are random variables over time due to influence of
one or more factors other than time. They forecast the values of variables based on
factors other than time. E.g. Demand for woolen clothes depends on the intensity of
winter. Demand for housing depends upon change in population and disposable

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income. Cause and Effect models enable us to predict variables not only using factors
that impact on other factors. These are accurate but need more data.
Regression Models:
(i) Simple Regression Model
Regression between two variables (a dependent variable Y and an independent
variable X) is given by the following equation:
Y = a +bX,
nXY - XY
_
_
b = and a = Y b X
nX2 (X)2
n = Number of values
a and b are Regression constants, where a is the Y intercept and b is the Slope of the
Regression Equation.
(ii) Multiple Regression Method: When there are more than one independent
variables (factors) that affect a dependent variable, Multiple Regressions is applied.
The model is expressed as:
Y is the expected demand, which is given by:
Y = B0 + B1X1 + B2X2 + .BnXn.
Where, B0 = Y-Intercept
B1,B2, .Bn = Parameters representing weightages of different factorX1, X2,
.Xn = Independent factors.
Multiple regression is more flexible than Simple Regression, as it can accommodate any
number of independent factors; but it is more complex and requires to be solved with
computer.

Example:
X 2 3
Y 7 9

4
10

5
14

6
15

Solution
We have now to set up a worksheet to get the values of the terms shown earlier. Worksheet for
Computing Correlation
X
Y
XY
X2

76

2
3
4
5
6

7
9
10
14
15

14
4
27
9
40
16
70
25
90
36
X = 20 Y
XY
X2 =90
Substituting these values in the normal equations given above
55 = 5a + 20b (i)
241 = 20a + 90b (ii)
Solving these we get,
a = 2.6
b = 2.1
Therefore, the regression equation of Y on X is
Y = 2.6 + 2.IX
Alternative Approach
We can use an alternative approach, which involves the use of two formulae-one to calculate the
Y-intercept and the other to calculate the slope. The formula for calculating the slope is
b

XY- nXY )/( X 2- nX2 )

In order to apply the above formula, we should know the values of X and Y in addition to those
XY
X2
X =X /n =20/5 =4
Y = Y /n
Calculating the value of b from above equation, we get
b = 2.1
The formula for calculating the Y-intercept of the line is
a Y bX
where a is Y-intercept. Applying this formula to calculate the Y-intercept, we get
a = 2.6
Hence, the regression equation is Y = 2.6 + 2.1X (same as was obtained earlier by applying the
normal equations). On the basis of this regression, we can find the value of Y for any value of X.
Suppose that we have to ascertain the value of Y where X is 14. Applying this value of X = 14 in
the above equation,

We are now clear as to how the regression line is obtained. The question is how to check the
accuracy of our results. One method is to draw a scatter diagram with original data pertaining to
X and Y series and then to fit a straight line. This graph will give a visual idea about the
suitability of the straight line fitted. A more refined and, therefore, better approach is based on
the mathematical properties of a line fitted by the method of least squares. This means that the
positive and the negative errors (i.e. differences between the original data points and the

77

calculated points) must be equal so that when all individual errors are added together, the result
is zero.
X
2

Y
7

Yc

Y-Yc

-1.0
= 15.2

-0.2
Total 0

Here, the calculated value of Y is shown as Yc. We find that the sum of positive errors Y - Yc, is
equal to 1.2. The same is true for negative errors. Thus, the sum of the column Y- Yc, comes to
zero. This means problem solved is correct.
Regression Coefficients
So far our discussion on regression analysis related to finding the regression of Y on X. It is just
possible that we may think of X as dependent variable and Y as an independent one. In that case,
we may have to use X = a + bY as an estimating equation. Then, the normal equations will be
X = na +b Y
XY = aY + Y2
X, Y, XY, Y2 and n. Once these values are known,
we may enter them in the two normal equations. The equations then can be solved in the same
manner as in the case of regression of Y on X.
i. Regression equation of Y on X
Y- Y r(sy /sx )(X- X )
The term r(sy /sx
XY
X2
ii. Regression equation of X on Y
X- X r(sx /sy )(Y- Y )
The term r(sy /sx
XY / Y2
It may be noted that the square root of the product of two regression coefficients is the value of
the coefficient of correlation.
We may write
bxy or r(sx /sy
xy y2
byx or r(sx /sy
xy/x 2
r bxy *b yx )^0.5
Another point to note is that x and y are the deviations in X and Y series from their arithmetic
means.

Example:
X
Y
2
7
3
9
4
10
5
14
6
15

x =X- X
-2
-1
0
1
2

x2
4
1
0
1
4

y =Y- Y
-4
-2
-1
3
4

y2
16
4
1
9
16

xy
8
2
0
3
8
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20

55

x = 0

y2 = 46

xy = 21

X =20/5 = 4
Y =55/5 = 11
Regression equation of X on Y:
X -X =r(s x /s y )(Y- Y )
On putting the values, we get
Y = 2.6 + 2.1X
Also,
r bxy *b yx)^0.5
xy y 2 )*( xy/x2 ))^0.5
= ((21/46)*(21/10))^0.5
= (0.9587)^0.5
= 0.98
Regression equation of X on Y is
X- X r(s x /s y )(Y -Y )
or X = 40 + 0.5 (10/9) (Y - 45)
or X = 40 + 0.556 (Y - 45)
or X = 40 + 0.556Y- 25.02
or X = 14.98 + 056Y
In order to estimate the value of Y for X = 48, we have to use the regression equation of Y on X
Y = 27 + 0.45X
when X= 48
or Y= 27 + 21.6
or Y = 48.6
Chain Ratio Method:
When the demand of a product is influenced by a chain of factors, the chain ratio is
useful. The first step in the method is to identify all the factors and their inter linkages
quantitatively. In the second step, the ultimate impact on the demand estimate for the
product can be determined. (eg. Demand for Gymnasium)
End Use Method:
The demand for products in industries such as auto components, industrial chemicals,
machine tools, etc. depends on the demand condition of the industries which use these
products. In such cases, the demand will have to be estimated basing on the demand
conditions in the user industry and the market share targeted. First the production of each
of the user industries should be determined. Then the no. of units of the products
consumed per each unit produced by the user industries can be estimated, which gives the
total demand for the product. The proportion of the total demand expected to be captured
gives the demand projection for the firm.

79

Econometric Method:
The demand for many products like steel, cement, power, etc., depends on the general
economic activity. To forecast the demand in such industries, a model consisting of all
the major economic factors should be developed. The impact of the variables can be
found out using multiple regression as already studied above, which is given below:
Y = B0 + B1X1 + B2X2 + .BnXn.
Y= Demand to be estimated
Where, B0 = Y-Intercept
B1,B2, .Bn = Parameters representing weightages of different factor
X1, X2, .Xn = Independent factors.

Consumption Level Method: Mostly, the demand for the consumer goods, depend on the
income levels of the consumers and the change in prices. The impact of these factors can be
studied under two different methods as follows:-

(i) Income Elasticity of Demand (IED) Method:

Change in demand

(Q2 Q1)/[(Q1+Q2)/2]

IED = --------------------------- = -------------------------------Change in income

(I2 I1)/[(I1+I2)/2]

Where, Q2 = Demand after change

Q1 = Demand before change
I2 = Income after change
I1 = Income before change
(ii) Price Elasticity of Demand (PED) Method:

80

Change in demand
(Q2 Q1)/[(Q1+Q2)/2]
IED = --------------------------- = -------------------------------Change in Price
(P2 P1)/[(P1+P2)/2]
Where, Q2 = Demand after change
Q1 = Demand before change
P2 = Price after change
P1 = Price before change
C. Qualitative Models:
When quantitative estimation is not possible, Qualitative Models, which involve estimating the
demand subjectively, are used. These methods are quick and simple, but the element of
subjectivity, which is their principle defect, should be kept in view while using them. The
following three models are very popular among the qualitative methods:(i) Field Sales Force Method
In this method, the salesmen of the company are asked to estimate the potential sales in their
territory of jurisdiction. All the forecasts from various territories are pooled and combined
demand for the firm is obtained. This method is fast and accurate as the sales men know better
about the future sales prospects. The disadvantages may be over estimates or under estimates due
to more incentives
(ii) Delphi Method
In this method, estimates are called from a group or a panel of experts in the field, but the group
is not allowed to meet, discuss, and debate each others opinions. Individual experts are asked to
give their estimates independently, to avoid one group influencing the other. A panel of cocoordinators carries out the job of reconciling the views of all of them. First the co-coordinator
solicits the opinion from all the experts. Then, those whose opinions are well off the average are
asked to explain the rationales of their position. A second round of questionnaire is sent to them.
When a reasonable consensus is arrived at, the co-ordinates sums up the outcome of the exercise
and calculates the demand.
(iii) Jury of Executive Opinion Method
This is a variation from Delphi Method wherein a group of managers are advised to sit together
and arrive at a forecast. This method is quick, takes view points of all people, and is more
interesting to managers rather than trend projection method. Its weaknesses are that the managers
may be biased, and sometimes it is very difficult to arrive at a consensus quickly.

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Technical Analysis
In technical analysis we study the technical aspects of setting up project. Selection of technology
and how to move on the acquisition of technology, purchasing the materials and equipments,
selecting the site and layout of facilities on the site and finally consider about the pollution and
effluent disposal is part of technical analysis.
Technological decisions are generally irreversible
Requires a big outlay of investment
Competitiveness of company can also be get affected
Project Procurement Management
Project Procurement Planning
This document details the manner in which other procurement processes will be managed i. e.,
starting from the solicitation planning till the contract closing. Project procurement planning is
the process of discovering the needs of the project that can be satisfied by acquiring products and
services from firms external to the project organization. The request for the products has to go
through a procurement process, starting from the solicitation planning to contract closure.
The primary objective of a procurement planning process is to decide and plan for acquiring all
products and services from vendors single or multiple vendors. Some of the inputs required to
prepare the procurement plan are:
1.
2.
3.
4.
5.
6.

Statement of scope
Description of product or services
Procurement of resources
Market conditions
Make or buy analysis
Expert judgment

Procurement of resources
It gives a description of resources needed to procure the products and services from the market as
per the specifications given in the product or service description document.
Market Conditions
Planning for procuring goods and services from vendors, the project or purchase manager should
be aware of the products or services available in the market. Macro economic factors like
inflation rate and government regulations influence procurement plans. Along with these factors

82

there are certain other factors also which should be keep in mind while planning procurement
such as quality management, cash flow statement, risk management, staffing, initial ordering
costs and the work breakdown structure.
Make or Buy Analyses
Once we have required information about the product and market conditions then we need to
decide whether to source these products from within the organization or from outside vendors. If
organization has free machine time and infrastructure that can satisfy the need of project in a cost
effective manner, then it is better to make the product from within the organization than to
source from external vendors. But if the costs, the infrastructure and other resources are not
appropriate, then it is better to buy it from external vendor.
Expert Judgment
Expert judgment is used to analyze and judge the inputs of the procurement process. It is
provided by a single individual or a group of individuals who are experts in specific fields.
Selection of Appropriate type of contract
There are following major type of contracts1.
2.
3.
4.
5.

Fixed price contract

Cost-Plus-Fixed-Fee or Cost-Plus-Percentage-Fee contracts
Guaranteed Maximum and Shared Savings contract
Fixed-Price-Incentive-Fee contracts
Cost-Plus-Incentive-Fee contracts

Work Statement
It is detailed description of the product or services to be procured for the vendor to decide on his
potential to serve the project organization with the product or services that matches their
expectations. The details vary depending on the nature of the product or service to be procured,
or the requirements of the project organization and type of contract to be administered.
Solicitation Planning
Solicitation planning is the process of developing the documents that are needed to support
solicitation. It involves preparation of the procurement management plan, the statement of work,
standard forms and expert evaluation that forms the procurement documents and criteria for
judging the vendor.
Procurement Document

83

That document I used to invite proposals from eligible vendors. Ideal procurement document
should be a balanced by two factors i.e., on the one hand, it should be rigid in seeking responses
that are corresponding and comparable but on the other hand, it should be flexible to encourage
suggestions from the vendor so as to enhance ways of satisfying the need.
Vendor Judgment
This involves evaluating various proposals received from different prospective vendors, by rating
them. There are following factors to evaluate vendors:
1.
2.
3.
4.
5.
6.

Need interpretation given by vendor

Cost of procurement
Could that be at lowest cost
Technical expertise
Management practice in use to complete project in time
Financial capability of vendor

Solicitation
It is a process of obtaining quotations, bids, offers or proposals from all prospective vendors.
Vendor Selection
Vendor selection is a process of receiving quotations or proposals from prospective vendors and
evaluating these proposals to choose the right vendor. The tools and techniques used for
selecting a vendor are as follows:
1.
2.
3.
4.

Contract negotiation
Weighing system
Screening System
Developing independent estimates

Contract Administration
It is the process of making sure that the vendors performance satisfies the project needs
mentioned in the contract. If the project is so large that it requires multiple vendors to satisfy
needs, then the major area of concentration should be on handling the interfaces among the
multiple vendors.
Vendor Payments
Vendor should ensure timely and periodic submission of bills to the contract administrator for
payments for the completed work for as agreed in the contract. Billing document should contain
all supporting statement as mentioned in the contract.

84

Contract Closing
It is a process involving verification of the product along with the updating all project documents
with the final results and storing all project information for future retrieval.

Plant Location And Layout

Plant location or the facilities location problem is an important strategic level decision making
for an organization. One of the key features of a conversion process (manufacturing system) is
the efficiency with which the products (services) are transferred to the customers. This fact will
include the determination of where to place the plant or facility.
The selection of location is a key-decision as large investment is made in building plant and
machinery. It is not advisable or not possible to change the location very often. So an improper
location of plant may lead to waste of all the investments made in building and machinery,
equipment.
Before a location for a plant is selected, long range forecasts should be made anticipating future
needs of the company. The plant location should be based on the companys expansion plan and
policy, diversification plan for the products, changing market conditions, the changing sources of
raw materials and many other factors that influence the choice of the location decision. The
purpose of the location study is to find an optimum location one that will result in the greatest
advantage to the organization.
The need for selecting a suitable location arises because of three situations
I. When starting a new organization, i.e., location choice for the first time.
II. In case of existing organization.
III. In case of Global Location.
I. In Case of Location Choice for the First Time or New Organizations
Cost economies are always important while selecting a location for the first time, but should
keep in mind the cost of long-term business/organizational objectives. The following are the
factors to be considered while selecting the location for the new organizations:
1. Identification of region: The organizational objectives along with the various long-term
considerations about marketing, technology, internal organizational strengths and weaknesses,
region specific resources and business environment, legal-governmental environment, social
environment and geographical environment suggest a suitable region for locating the operations
facility.
2. Choice of a site within a region: Once the suitable region is identified, the next step is
choosing the best site from an available set. Choice of a site is less dependent on the
organizations long-term strategies. Evaluation of alternative sites for their tangible and
intangible costs will resolve facilities-location problem.
The problem of location of a site within the region can be approached with the following costoriented non-interactive model, i.e., dimensional analysis.
3. Dimensional analysis: If all the costs were tangible and quantifiable, the comparison and
selection of a site is easy. The location with the least cost is selected. In most of the cases
intangible costs which are expressed in relative terms than in absolute terms. Their relative

85

merits and demerits of sites can also be compared easily. Since both tangible and intangible costs
need to be considered for a selection of a site, dimensional analysis is used.
When starting a new factory, plant location decisions are very important because they have direct
bearing on factors like, financial, employment and distribution patterns. In the long run,
relocation of plant may even benefit the organization. But, the relocation of the plant involves
stoppage of production, and also cost for shifting the facilities to a new location. In addition to
these things, it will introduce some inconvenience in the normal functioning of the business.
Hence, at the time of starting any industry, one should generate several alternate sites for
locating the plant. After a critical analysis, the best site is to be selected for commissioning the
plant. Location of warehouses and other facilities are also having direct bearing on the
operational performance of organizations. The existing firms will seek new locations in order to
expand the capacity or to place the existing facilities. When the demand for product increases, it
will give rise to following decisions:
_ Whether to expand the existing capacity and facilities.
_ Whether to look for new locations for additional facilities.
_ Whether to close down existing facilities to take advantage of some new locations.
II. In Case of Location Choice for Existing Organization
In this case a manufacturing plant has to fit into a multi-plant operations strategy. That is,
additional plant location in the same premises and elsewhere under following circumstances:
1. Plant manufacturing distinct products.
2. Manufacturing plant supplying to specific market area.
3. Plant divided on the basis of the process or stages in manufacturing.
4. Plants emphasizing flexibility.
The different operations strategies under the above circumstances could be:
1. Plants manufacturing distinct products: Each plant services the entire market area for the
organization. This strategy is necessary where the needs of technological and resource inputs are
specialized or distinctively different for the different product-lines.
For example, a high quality precision product-line should not be located along with other
product-line requiring little emphasis on precision. It may not be proper to have too many
contradictions such as sophisticated and old equipment, highly skilled and semi-skilled
personnel, delicates processes and those that could permit rough handlings, all under one roof
and one set of managers. Such a setting leads to much confusion regarding the required emphasis
and the management policies.
Product specialization may be necessary in a highly competitive market. It may be necessary to
exploit the special resources of a particular geographical area. The more decentralized these pairs
are in terms of the management and in terms of their physical location, the better would be the
planning and control and the utilization of the resources.
2. Manufacturing plants supplying to a specific market area: Here, each plant manufactures
almost all of the companys products. This type of strategy is useful where market proximity
consideration dominates the resources and technology considerations. This strategy requires
great deal of coordination from the corporate office. An extreme example of this strategy is that
of soft drinks bottling plants.
3. Plants divided on the basis of the process or stages in manufacturing: Each production
process or stage of manufacturing may require distinctively different equipment capabilities,
labor skills, technologies, and managerial policies and emphasis. Since the products of one plant
feed into the other plant, this strategy requires much centralized coordination of the

86

manufacturing activities from the corporate office that are expected to understand the various
technological aspects of all the plants.
4. Plants emphasizing flexibility: This requires much coordination between plants to meet the
changing needs and at the same time ensure efficient use of the facilities and resources.
Frequent changes in the long-term strategy in order to improve be efficiently temporarily, are not
healthy for the organization. In any facility location problem the central question is: Is this a
location at which the company can remain competitive for a long time?
For an established organization in order to add on to the capacity, following are the ways:
(a) Expansion of the facilities at the existing site: This is acceptable when it does not violate the
basic business and managerial outlines, i.e., philosophies, purposes, strategies and capabilities.
For example, expansion should not compromise quality, delivery, or customer service.
(b) Relocation of the facilities (closing down the existing ones): This is a drastic step which can
be called as Uprooting and Transplanting. Unless there are very compelling reasons, relocation
is not done. The reasons will be either bringing radical changes in technology, resource
availability or other destabilization.
All these factors are applicable to service organizations, whose objectives, priorities and
strategies may differ from those of hardcore manufacturing organizations.
III. In Case of Global Location
Because of globalization, multinational corporations are setting up their organizations in India
and Indian companies are extending their operations in other countries. In case of global
locations there is scope for virtual proximity and virtual factory.
VIRTUAL PROXIMITY
With the advance in telecommunications technology, a firm can be in virtual proximity to its
customers. For a software services firm much of its logistics is through the information/
communication pathway. Many firms use the communications highway for conducting a large
portion of their business transactions. Logistics is certainly an important factor in deciding on a
locationwhether in the home country or abroad. Markets have to be reached. Customers have
to be contacted. Hence, a market presence in the country of the customers is quite necessary.
VIRTUAL FACTORY
Many firms based in USA and UK in the service sector and in the manufacturing sector often out
sources part of their business processes to foreign locations such as India. Thus, instead of ones
own operations, a firm could use its business associates operations facilities. The Indian BPO
firm is a foreign-based companys virtual service factory. So a location could be ones own or
ones business associates. The location decision need not always necessarily pertain to own
operations.

FACTORS INFLUENCING PLANT LOCATION/FACILITY LOCATION

Facility location is the process of determining a geographic site for a firms operations.
Managers of both service and manufacturing organizations must weigh many factors when
assessing the desirability of a particular site, including proximity to customers and suppliers,
labor costs, and transportation costs.

87

Location conditions are complex and each comprises a different Characteristic of a tangible (i.e.
Freight rates, production costs) and non-tangible (i.e. reliability, Frequency security, quality)
nature.
Location conditions are hard to measure. Tangible cost based factors such as wages and products
costs can be quantified precisely into what makes locations better to compare. On the other hand
non-tangible features, which refer to such characteristics as reliability, availability and security,
can only be measured along an ordinal or even nominal scale. Other non-tangible features like
the percentage of employees that are unionized can be measured as well. To sum this up nontangible features are very important for business location decisions. It is appropriate to divide the
factors, which influence the plant location or facility location on the basis of the nature of the
organization as
1. General locational factors, which include controllable and uncontrollable factors for all type
of organizations.
2. Specific locational factors specifically required for manufacturing and service organizations.
Location factors can be further divided into two categories:
Dominant factors are those derived from competitive priorities (cost, quality, time, and
flexibility) and have a particularly strong impact on sales or costs. Secondary factors also are
important, but management may downplay or even ignore some of them if other factors are more
important.
General Locational Factors
Following are the general factors required for location of plant in case of all types of
organisations.
CONTROLLABLE FACTORS
1. Proximity to markets
2. Supply of materials
3. Transportation facilities
4. Infrastructure availability
5. Labor and wages
6. External economies
7. Capital
UNCONTROLLABLE FACTORS
8. Government policy
9. Climate conditions
10. Supporting industries and services
11. Community and labour attitudes
12. Community Infrastructure

CONTROLLABLE FACTORS
1. Proximity to markets: Every company is expected to serve its customers by providing goods
and services at the time needed and at reasonable price organizations may choose to locate
facilities close to the market or away from the market depending upon the product. When the
buyers for the product are concentrated, it is advisable to locate the facilities close to the market.
Locating nearer to the market is preferred if

88

 The products are delicate and susceptible to spoilage.

After sales services are promptly required very often.
Transportation cost is high and increase the cost significantly.
Shelf life of the product is low.
Nearness to the market ensures a consistent supply of goods to customers and reduces the cost of
transportation.
2. Supply of raw material: It is essential for the organization to get raw material in right
qualities and time in order to have an uninterrupted production. This factor becomes very
important if the materials are perishable and cost of transportation is very high.
General guidelines regarding effects of raw materials on plant location are:
When a single raw material is used without loss of weight, locate the plant at the raw material
source, at the market or at any point in between.
When weight loosing raw material is demanded, locate the plant at the raw material source.
When raw material is universally available, locate close to the market area.
If the raw materials are processed from variety of locations, the plant may be situated so as to
minimize total transportation costs.
Nearness to raw material is important in case of industries such as sugar, cement, jute and cotton
textiles.
3. Transportation facilities: Speedy transport facilities ensure timely supply of raw materials to
the company and finished goods to the customers. The transport facility is a prerequisite for the
location of the plant. There are five basic modes of physical transportation, air, road, rail, water
and pipeline. Goods that are mainly intended for exports demand a location near to the port or
large airport. The choice of transport method and hence the location will depend on relative
costs, convenience, and suitability. Thus transportation cost to value added is one of the criteria
for plant location.
4. Infrastructure availability: The basic infrastructure facilities like power, water and waste
disposal, etc., become the prominent factors in deciding the location. Certain types of industries
are power hungry e.g., aluminum and steel and they should be located close to the power station
or location where uninterrupted power supply is assured throughout the year. The nonavailability of power may become a survival problem for such industries. Process industries like
paper, chemical, cement, etc., require continuous. Supply of water in large amount and good
quality, and mineral content of water becomes an important factor. A waste disposal facility for
process industries is an important factor, which influences the plant location.
5. Labour and wages: The problem of securing adequate number of labour and with skills
specific is a factor to be considered both at territorial as well as at community level during plant
location. Importing labour is usually costly and involve administrative problem. The history of
labour relations in a prospective community is to be studied. Prospective community is to be
studied. Productivity of labour is also an important factor to be considered. Prevailing wage
pattern, cost of living and industrial relation and bargaining power of the unions forms in
important considerations.
6. External economies of scale: External economies of scale can be described as urbanization
and locational economies of scale. It refers to advantages of a company by setting up operations
in a large city while the second one refers to the settling down among other companies of
related Industries. In the case of urbanization economies, firms derive from locating in larger
cities rather than in smaller ones in a search of having access to a large pool of labour, transport

89

facilities, and as well to increase their markets for selling their products and have access to a
much wider range of business services.
Location economies of scale in the manufacturing sector have evolved over time and have
mainly increased competition due to production facilities and lower production costs as a result
of lower transportation and logistical costs. This led to manufacturing districts where many
companies of related industries are located more or less in the same area. As large corporations
have realized that inventories and warehouses have become a major cost factor, they have tried
reducing inventory costs by launching Just in Time production system (the so called Kanban
System). This high efficient production system was one main factor in the Japanese car industry
for being so successful. Just in time ensures to get spare parts from suppliers within just a few
hours after ordering. To fulfill these criteria corporations have to be located in the same area
increasing their market and service for large corporations.
7. Capital: By looking at capital as a location condition, it is important to distinguish the
physiology of fixed capital in buildings and equipment from financial capital. Fixed capital costs
as building and construction costs vary from region to region. But on the other hand buildings
can also be rented and existing plants can be expanded. Financial capital is highly mobile and
does not very much influence decisions. For example, large Multinational Corporations such as
Coca Cola operate in many different countries and can raise capital where interest rates are
lowest and conditions are most suitable.
Capital becomes a main factor when it comes to venture capital. In that case young, fast growing
(or not) high tech firms are concerned which usually have not many fixed assets. These firms
particularly need access to financial capital and also skilled educated employees.
UNCONTROLLABLE FACTORS
8. Government policy: The policies of the state governments and local bodies concerning labour
laws, building codes, safety, etc., are the factors that demand attention. In order to have a
balanced regional growth of industries, both central and state governments in our country offer
the package of incentives to entrepreneurs in particular locations. The incentive package may be
in the form of exemption from a safes tax and excise duties for a specific period, soft loan from
financial institutions, subsidy in electricity charges and investment subsidy. Some of these
incentives may tempt to locate the plant to avail these facilities offered.
9. Climatic conditions: The geology of the area needs to be considered together with climatic
conditions (humidity, temperature). Climates greatly influence human efficiency and behaviour.
Some industries require specific climatic conditions e.g., textile mill will require humidity.
10. Supporting industries and services: Now a day the manufacturing organization will not
make all the components and parts by itself and it subcontracts the work to vendors. So, the
source of supply of component parts will be the one of the factors that influences the location.
The various services like communications, banking services professional consultancy services
and other civil amenities services will play a vital role in selection of a location.
11. Community and labour attitudes: Community attitude towards their work and towards the
prospective industries can make or mar the industry. Community attitudes towards supporting
trade union activities are important criteria. Facility location in specific location is not desirable
even though all factors are favouring because of labour attitude towards management, which
brings very often the strikes and lockouts.
12. Community infrastructure and amenity: All manufacturing activities require access to a
community infrastructure, most notably economic overhead capital, such as roads, railways, port

90

facilities, power lines and service facilities and social overhead capital like schools, universities
and hospitals.
These factors are also needed to be considered by location decisions as infrastructure is
enormously expensive to build and for most manufacturing activities the existing stock of
infrastructure provides physical restrictions on location possibilities.
PLANT LAYOUT
Plant layout refers to the physical arrangement of production facilities. It is the configuration of
departments, work centres and equipment in the conversion process. It is a floor plan of the
physical facilities, which are used in production.
According to Moore Plant layout is a plan of an optimum arrangement of facilities including
personnel, operating equipment, storage space, material handling equipment and all other
supporting services along with the design of best structure to contain all these facilities.
Objectives of Plant Layout
The primary goal of the plant layout is to maximise the profit by arrangement of all the plant
facilities to the best advantage of total manufacturing of the product. The objectives of plant
layout are:
1. Streamline the flow of materials through the plant.
2. Facilitate the manufacturing process.
3. Maintain high turnover of in-process inventory.
4. Minimise materials handling and cost.
5. Effective utilisation of men, equipment and space.
6. Make effective utilisation of cubic space.
7. Flexibility of manufacturing operations and arrangements.
8. Provide for employee convenience, safety and comfort.
9. Minimize investment in equipment.
10. Minimize overall production time.
11. Maintain flexibility of arrangement and operation.
12. Facilitate the organizational structure.
Principles of Plant Layout
1. Principle of integration: A good layout is one that integrates men, materials, machines and
supporting services and others in order to get the optimum utilisation of resources and maximum
effectiveness.
2. Principle of minimum distance: This principle is concerned with the minimum travel (or
movement) of man and materials. The facilities should be arranged such that, the total distance
travelled by the men and materials should be minimum and as far as possible straight line
movement should be preferred.
3. Principle of cubic space utilisation: The good layout is one that utilise both horizontal and
vertical space. It is not only enough if only the floor space is utilised optimally but the third
dimension, i.e., the height is also to be utilised effectively.
4. Principle of flow: A good layout is one that makes the materials to move in forward direction
towards the completion stage, i.e., there should not be any backtracking.
5. Principle of maximum flexibility: The good layout is one that can be altered without much
cost and time, i.e., future requirements should be taken into account while designing the present
layout.

91

6. Principle of safety, security and satisfaction: A good layout is one that gives due
consideration to workers safety and satisfaction and safeguards the plant and machinery against
fire, theft, etc.
7. Principle of minimum handling: A good layout is one that reduces the material handling to
the minimum.
CLASSIFICATION OF LAYOUT
Layouts can be classified into the following five categories:
1. Process layout
2. Product layout
3. Combination layout
4. Fixed position layout
5. Group layout
Process Layout
Process layout is recommended for batch production. All machines performing similar type of
operations are grouped at one location in the process layout e.g., all lathes, milling machines, etc.
are grouped in the shop will be clustered in like groups.
Thus, in process layout the arrangement of facilities are grouped together according to their
functions. The flow paths of material through the facilities from one functional area to another
vary from product to product. Usually the paths are long and there will be possibility of
backtracking.
Process layout is normally used when the production volume is not sufficient to justify a product
layout. Typically, job shops employ process layouts due to the variety of products manufactured
and their low production volumes.
Advantages
1. In process layout machines are better utilized and fewer machines are required.
2. Flexibility of equipment and personnel is possible in process layout.
3. Lower investment on account of comparatively less number of machines and lower cost of
general purpose machines.
4. Higher utilisation of production facilities.
5. A high degree of flexibility with regards to work distribution to machineries and workers.
6. The diversity of tasks and variety of job makes the job challenging and interesting.
7. Supervisors will become highly knowledgeable about the functions under their department.
Limitations
1. Backtracking and long movements may occur in the handling of materials thus, reducing
material handling efficiency.
2. Material handling cannot be mechanized which adds to cost.
3. Process time is prolonged which reduce the inventory turnover and increases the in process
inventory.
4. Lowered productivity due to number of set-ups.
5. Throughput (time gap between in and out in the process) time is longer.
6. Space and capital are tied up by work-in-process.
Product Layout
In this type of layout, machines and auxiliary services are located according to the processing
sequence of the product. If the volume of production of one or more products is large, the

92

facilities can be arranged to achieve efficient flow of materials and lower cost per unit. Special
purpose machines are used which perform the required function quickly and reliably.
The product layout is selected when the volume of production of a product is high such that a
separate production line to manufacture it can be justified. In a strict product layout, machines
are not shared by different products. Therefore, the production volume must be sufficient to
achieve satisfactory utilization of the equipment.
Advantages
1. The flow of product will be smooth and logical in flow lines.
2. In-process inventory is less.
3. Throughput time is less.
4. Minimum material handling cost.
5. Simplified production, planning and control systems are possible.
6. Less space is occupied by work transit and for temporary storage.
7. Reduced material handling cost due to mechanised handling systems and straight flow.
8. Perfect line balancing which eliminates bottlenecks and idle capacity.
9. Manufacturing cycle is short due to uninterrupted flow of materials.
10. Small amount of work-in-process inventory.
11. Unskilled workers can learn and manage the production.
Limitations
1. A breakdown of one machine in a product line may cause stoppages of machines in the
downstream of the line.
2. A change in product design may require major alterations in the layout.
3. The line output is decided by the bottleneck machine.
4. Comparatively high investment in equipments is required.
5. Lack of flexibility- A change in product may require the facility modification.
Combination Layout
A combination of process and product layouts combines the advantages of both types of layouts.
A combination layout is possible where an item is being made in different types and sizes. Here
machinery is arranged in a process layout but the process grouping is then arranged in a sequence
to manufacture various types and sizes of products. It is to be noted that the sequence of
operations remains same with the variety of products and sizes.
Fixed Position Layout
This is also called the project type of layout. In this type of layout, the material, or major
components remain in a fixed location and tools, machinery, men and other materials are brought
to this location. This type of layout is suitable when one or a few pieces of identical heavy
products are to be manufactured and when the assembly consists of large number of heavy parts,
the cost of transportation of these parts is very high.
Advantages
The major advantages of this type of layout are:
1. Helps in job enlargement and upgrades the skills of the operators.
2. The workers identify themselves with a product in which they take interest and pride in doing
the job.
3. Greater flexibility with this type of layout.
4. Layout capital investment is lower.
Group Layout (or Cellular Layout)

93

There is a trend now to bring an element of flexibility into manufacturing system as regards to
variation in batch sizes and sequence of operations. A grouping of equipment for performing a
sequence of operations on family of similar components or products has become all the
important.
Group technology (GT) is the analysis and comparisons of items to group them into families
with similar characteristics. GT can be used to develop a hybrid between pure process layout and
pure flow line (product) layout. This technique is very useful for companies that produce variety
of parts in small batches to enable them to take advantage and economics of flow line layout.
The application of group technology involves two basic steps; first step is to determine
component families or groups. The second step in applying group technology is to arrange the
plants equipment used to process a particular family of components. This represents small plants
within the plants. The group technology reduces production planning time for jobs. It reduces the
set-up time.
Thus group layout is a combination of the product layout and process layout. It combines the
advantages of both layout systems. If there are m-machines and n-components, in a group layout
(Group-Technology Layout), the m-machines and n-components will be divided into distinct
number of machine-component cells (group) such that all the components assigned to a cell are
almost processed within that cell itself. Here, the objective is to minimize the intercell
movements.
The basic aim of a group technology layout is to identify families of components that require
similar of satisfying all the requirements of the machines are grouped into cells. Each cell is
capable of satisfying all the requirements of the component family assigned to it.
The layout design process considers mostly a single objective while designing layouts. In process
layout, the objective is to minimize the total cost of materials handling. Because of the nature of
the layout, the cost of equipments will be the minimum in this type of layout. In product layout,
the cost of materials handling will be at the absolute minimum. But the cost of equipments would
not be at the minimum if the equipments are not fully utilized.
In-group technology layout, the objective is to minimize the sum of the cost of transportation and
the cost of equipments. So, this is called as multi-objective layout.
Advantages of Group Technology Layout
Group Technology layout can increase
1. Component standardization and rationalization.
2. Reliability of estimates.
3. Effective machine operation and productivity.
4. Customer service.
It can decrease the
1. Paper work and overall production time.
2. Work-in-progress and work movement.
3. Overall cost.
Limitations of Group Technology Layout
This type of layout may not be feasible for all situations. If the product mix is completely
dissimilar, then we may not have meaningful cell formation.

94

Financial Analysis
Financial analysis include 1.
2.
3.
4.
5.
6.
7.

Estimation of Cost of the Project

Estimation of Means of Finance
Estimation of Working Capital
Estimation of Profitability (or P & L Statement)
Estimation of Cash Flow Projections
Estimation of Balance Sheet
Ratio Analysis (Break-Even, NPV, IRR, DSCR etc.)

1. Estimation of the Cost of the Project:

This is the first step in conducting financial analysis/appraisal. The main contents of the project
cost are as follows:Rs. (in Lakhs)
Land and site development

..

Civil works:
Buildings (Factory/ Administrative)
Plant ad Machinery;
Imported:
Clearing and forwarding
Indigenous:
Foundation and Installation
Misc. Fixed Assets
Training Expenses on:
Foreign technicians
Indian technicians abroad
Preliminary & Pre-operative expenses
Provision for contingencies

95

..

Margin money for working capital

-------------Total:

..
--------------

ESTIMATED COST OF THE PROJECT (Detailed Statement)

Cost already incurred Cost to be incurred

upto
Rupe
e
Cost

(1)
1.
Land
and
development:

Grand
Total

Rupe Total Rupee

e
Cost
equiv
alent
of
foreig
n
excha
nge
cost

Rupe Total
e
equiv
alent
of
foreig
n
excha
nge
cost

(3) + (6)

(2)

(5)

(7)

(3)

(4)

(6)

Site

a.
Cost
including
conveyance charges of ___
hectares of freehold land
acquired/ proposed to be
acquired at he rate of Rs.
___ per hectare
b. Premium payable on
leasehold
land
and
conveyance charges (___

96

hectates at the rate of Rs.

___ per hectare).
c. Cost of leveling and
development of ___ hectares
of land at Rs. ___ per
hectare.
d. Cost of laying road:
(i) approach road conecting
the factor site to main road
___ rm. Of ___ (type of
construction) at Rs. ___ per
rm.
(ii) internal roads for the
factory ____ rm. of ___
(type of construction) at Rs.
___ per rm.
e.
Cost
of
fencing/
compound wall ___ rm of
___ (type of construction) at
Rs. ___ per rm.
f. Cost of gates (No. of gates
___)
2. Buildings:
a. Factory building for the
main plant and equipment.
b. Factory buildings for
auxiliary services like seam
supply,
water
supply,
laboratory workshop, etc.
c. Administrative buildings.
d. God owns, warehouses
and open yard facilities.
e.

Miscellaneous

non-

97

factory
buildings
like
canteen, guest houses, times
offices, excise house, etc.
f. Quarters for essential
staff.
g. Silos, tanks, wells, chest
basin, cisterns, hoopers,
bines and other structures,
which are necessary, for
installation of plant and
equipment and which ma be
constructed in RCC and
such other structural civil
engineering materials.
h. Garages.
i. Cost of sewers, drainage,
etc.
j. Civil engineering works
not included above.
k. Architects fees.
3. Plant and Machinery
i. Imported:
a. FOB value.
b. Shipping freight and
insurance
[___percent of (a)]
c. Import duty.
d. Clearing,
loading,
unloading
and
transport charges to
actor site.
ii. Indigenous:
a. FOR cost
b. Sales tax (percent),
Octroi (percent) and
other taxes, if any.
98

c. Railway freight and

transports charges to
site.
iii. Machinery stores and
spares.
iv.
Foundation
and
installation
charges
on
imported and indigenous
machinery
4. Technical know-how
fees and expenses on
drawings, etc, payable to
technical collaborators:
5. Expenses on foreign
technicians and training of
Indian technicians abroad:
a. Foreign technicians.
b. Indian technicians (____
persons for ____ months).
6. Miscellaneous
assets:

fixed

a. Furniture
b. Office machinery and
equipment.
c. Miscellaneous
tools
and
equipment
including
erections
tools.
d. Cars,
trucks,
etc.
(___cars;___ trucks).
e. Railway siding.
f. Equipment (including
cost of installation),
cabling,
etc.,
for
distribution of power
and light for factory
and colony.
g. Equipment and piping
for
supply
and
99

treatment of water
(including cost of
installation).
h. Laboratory equipment.
i. Workshop equipment.
j. Fire
fighting
equipment.
k. Effluent
collection,
treatment and disposal
arrangement.
l. Miscellaneous fixed
assets.
7. Preliminary and capital
Isue expenses:
a. Brokerage
and
commission on capital
(___ percent of Rs.___
lakhs.)
b.Other
capital
issue
expenses
(legal,
advertisement, printing,
stationery, etc.)
c. Other
preliminary
expenses
(company
floatation and other
initial expenses).
8. Preoperative expenses:
(from ____date to date of
commencement
of
commercial production)
a. Establishment.
b.Rent, rates and taxes.
c. Travelling expenses.
d.Miscellaneous expenses.
e. Interest and commitemtn
charges on borrowings
(give
details
of
calculations).
f. Insurance
during
construction including
erection insurance.
g.Mortgage
expenses
100

(stamp duty, registration

charges and other legal
exepenses) (____percent
of loan of Rs. ___lakhs).
h.Interest on deferred
payments, of any.
9.
Provison
for
contingencies:

10. Margin money for

working capital:

Total Cost of the project:

ESTIMATES OF CONTINGENCY PROVISION

Sl.
No.

Item

Considered

1.

Land & site development

2.

Buildings

3.

Plant and Machinery

-

4.

imported
indigenous
Stores & Spares
Foundation
Installation
Technical know-how fees

5.

Miscellaneous fixed assets

Preliminary and preoperative expenses

Total

Firm

Non-Firm

(in Rs. lacs)

(in Rs. lacs)

&

TOTAL

101

2. Estimation of Means of Finance

(Rs. Lakhs)
Sl.
No.

Item

Foreign
Re. Amount
Exchange (Re.
Equiv)

1.

Equity Promoters
-

Total

Fin. Inst.
Others
Public

Pref. Shares
2.

Subsidy, if any

3.

Term loans SCICI

-

Other F.I.S.
Banks

4.

Debentures

5.

Unsecured loans and deposits

Deferred payments

7.

Internal accruals

8.

Bank borrowings
- Working capital

9.

Others
TOTAL

4. Estimation of Profitability (or P & L Statement)

(This is based on: Cost of production and Working results given below).
IV-13 Give estimates of cost of production for the first five years of operation

102

Year
+1

Year +2

Year +3

Year
+4

Year +5

Raw
Materials,
Chemicals,
Component & Consumable Stores
1)
2)
3)
4)
Total Material Costs (a)
Utilities
Power
Water
Fuel
Total Utilities

(b)

Labour & Plant Overheads

Wages
Factory Supervisor
Salaries
Bonus
Provident Fund
Total Labour

(c)

Factory Overhead
Repairs & Maint.
Light
Rent & Taxes on Factory Assets

103

Insurance
Misc Expenses
5% Contingency
Total Factory Overhead (d)
Estimate of Cost of Mfg
(a)+(b)+(c)+(d)

Provide estimates of production and sales for the first five years of operation (if more than one
product, prepare each response for each product separately)
Year
+1

Year +2

Year +3

Year
+4

Year +5

Installed Capacity

No of Working Days

No. of Shifts

Estimated Production per day

(Quantity)
Estimated
(Quantity)

Annual

Production

Estimated Output as % of Plant

Capacity
Sales after
(Quantity)

adjusting

stock

104

Unit Selling Price

Value of Sales

Give estimates of working results for the first five years of operation
Year
+1
Cost of Production
Question IV-12 (a)

Year +2

Year +3

Year
+4

Year +5

from

Administrative Expenses
Admn Salaries
Remun to Directors
Professional Fees
Office Supplies
Insurance & Taxes
Miscellaneous
Total Adm.expenses(b)
Total Sales Expenses(c)
Royalty/Know How (d)
Total Cost of Production
(e)=(a)+(b)+(c)+(d)
Expected Sales - from Question
IV-13 (f)
Gross Profit Before Int. (g)=(f)(e)

105

Financial Expenses
Interest on TL
Interest on WCL
Guarantee Comm.
Total Fncl Expense (h)

Depreciation (i)
Operating Profit (j)=(g)+(h)+(i)
Other Income, if any (k)
Prelim Exp Written off (l)
Profit / Loss
(m)=(j)+(k)+(l)

Before

Tax

Provision for Taxation (n)

Profit after Taxation (m)-(n)

5. Estimation of Cash Flow Projections

106

IV-17 Provide a cash flow statement for the company as a whole for the first five years of
operation
Year
+1

Year +2

Year +3

Year
+4

Year +5

Year
+1

Year +2

Year +3

Year
+4

Year +5

Sources of Funds
Share Issue

Profit before Interest and Tax

Depreciation Provision

Development Rebate Reserve

Increase in Secured Medium and
Long-Term Borrowing for Projects
Other Medium / Long-Term Loans
Increase in Unsecured Loans and
Deposits
Increase in WCL
Increase in Liabilities for Deferred
Payments to Machinery Suppliers
Sale of Fixed Assets
Sale of Investments
Other Income
Total Sources

107

Disposition of Funds
Capital Expenditure of the Project
Other
Normal
Expenditures

Capital

Increase in Working Capital

All-India Institutions
SFCS
Banks
Decrease in Unsecured Loans and
Deposits
Decrease in WCL
Decrease in Liabilities for
Deferred Payments to Machinery
Suppliers
Increase in Investments in Other
Companies
Interest on Term Loans
Interest on WCL
Taxation
Dividends
Equity
Preferences
Other Expenditures

Total Dispositions

108

Opening Balance of Cash in

Hand and at Bank
Net Surplus / Deficit
Closing Balance of Cash in Hand
and at Bank
6. Estimation of Balance Sheet

(Model Balance Sheet Vertical Form)

Projected Balance Sheet

Rs.
in
Lacs

As at March, 31

2010

201
2011
2

700.00 700.00

700. 700
00 .00

2165.0 2745.3
5
6

393
3335 3.3
.70
4

2865.0 3445.3
5
6

463
4035 3.3
.70
4

803.50 482.10

160.
70

2006

2007

2008

700.0
0 700.00

700.0
0

2009

SOURCES OF FUNDS

Share Holders Funds

Equity Share Capital

Reserves & Surplus

Sub Total (A)

486.0
3 995.39

1590.
52

1186. 1695.3
03
9

2290.
52

1607. 1446.3
00
0

1124.
90

Loan Funds

Term Loan

0.0
0

109

Working Capital Loan

Deferred Tax Liability

Unsecured loans from

Promoters

Sub Total (B)

TOTAL

(A) + (B)

950.0
0 950.00

950.0
0

103.0
0 103.00

103.0
0

2660. 2499.3
00
0

3846. 4194.6
03
9

2177.
90

4468.
42

950.00 950.00

950. 950
00 .00

103.00 103.00

103. 103
00 .00

1856.5 1535.1
0
0

105
1213 3.0
.70
0

4721.5 4980.4
5
6

568
5249 6.3
.40
4

2030.0 2030.0
0
0

203
2030 0.0
.00
0

351.82 439.77

527. 615
73 .68

1678.1 1590.2
8
3

141
1502 4.3
.27
2

APPLICATION OF FUNDS

Fixed Assets

Gross Block

Less: Depreciation

Net Fixed Assets

2030. 2030.0
00
0

2030.
00

87.95 175.91

263.8
6

1942. 1854.0
05
9

0.00

Investments

Current Assets, Loans & Advances

0.00

1766.
14

0.00

0.00

0.00

0.00

0.0
0

110

1249.9 1249.9
0
0

124
1249 9.9
.90
0

889.20 889.20

889. 889
20 .20

417.9
9

417.99 417.99

417. 417
99 .99

1114.9
868.04
1

1371
.81

100.00 200.00

300. 400
00 .00

3525.1 3872.0
3
0

475
4228 3.7
.90
9

481.77 481.77

481. 481
77 .77

3043.3 3390.2
6
4

427
3747 2.0
.13
2

4721.5 4980.4
5
6

568
5249 6.3
.40
4

Inventories

890.4 1097.6
0
0

1249.
90

Receivables

620.0
0 773.40

889.2
0

Other Current Assets

203.8
4 300.50

Cash & Bank Balances

33.00

42.00

45.00

Deposits & other Current

Assets

343.0
1 449.98

581.9
6

Total Current Assets

2090. 2663.4
25
8

3184.
05

Less: Current Liabilities and

186.2
7 322.89

481.7
7

179
6.7
0

Provisions

Net Current Assets 3 - 4

Preliminary Expenses

1903. 2340.6
98
0

2702.
28

(to the extent not w/o)

Total 1 + 2 + 5 + 6

3846. 4194.6
03
9

4468.
42

111

Check

0.00

0.00

0.00

0.00

0.00

0.00

WDV fixed Assets

19.42

18.54

17.66

16.78

15.90

15.0
2

Term Loan Outstanding

16.07

14.46

11.25

8.04

4.82

1.61

11.08

13.4
2

Margin of Security

% of Margin of Security

3.35

121%

4.08

6.41

128% 157%

8.75

209%

330%

0.0
0

935
%

Environmental Impact Analysis

In the modern world, due to rapid development of variety of industries, atmospheric pollution
(due to air, water, chemical and solid pollutants) has reached alarming proportions.
Def. of Environment

112

Environment is that which surrounds all of us i.e. the life and non-life components. The life
components include the plants, animals and micro-organism. The non-life components consist of
the land, water, air, clouds, sunshine etc.
According to the Environmental Protection Act, 1986, Environment includes water, air, land,
and the inter-relationship which exists among water, air, land, human beings, other living
creatures, plants and micro-organisms. It also includes the interactions between the non-life
components and their interactions with the living creatures also. The study of the interrelationships between various organisms and their environment is called ecology.
Factors which induce the firms to act in a more environment- friendly manner:

Pollution Control Regulations (Govt. Laws, Punishments and Penalties)

Consumer Pressure (To boycott products of pollutant companies products, normally in
the developed countries)
Pressures from the Local People (in labor intensive industries)
Pressure from the Investors ( Mostly in the West)

An environmental impact assessment (EIA) is an assessment of the possible impactpositive

or negativethat a proposed project may have on the environment, together consisting of the
natural, social and economic aspects.
The purpose of the assessment is to ensure that decision makers consider the ensuing
environmental impacts to decide whether to proceed with the project. The International
Association for Impact Assessment (IAIA) defines an environmental impact assessment as "the
process of identifying, predicting, evaluating and mitigating the biophysical, social, and other
relevant effects of development proposals prior to major decisions being taken and commitments
made.
After an EIA, the precautionary and polluter pays principles may be applied to prevent, limit, or
require strict liability or insurance coverage to a project, based on its likely harms.
Environmental impact assessments are sometimes controversial.
The Directive, known as the "EIA" (environmental impact assessment) Directive, requires an
assessment to be carried out by the competent national authority for certain projects which have
a physical effect on the environment.

113

The environmental impact assessment must identify the direct and indirect effects of a project on
the following factors: man, the fauna, the flora, the soil, water, air, the climate, the landscape, the
material assets and cultural heritage, and the interaction between these various elements.

Def. Environmental Pollution:

It means the presence in the environment of any solid, liquid, or gaseous substances, in
such concentration, that may or tend to be, injurious to the environment.
According to the Air (Prevention and Control of Pollution) Act, 1981, Air Pollution
includes excessive noise also. According to Water (Prevention and Control of Pollution)
Act, 1974, pollution means contamination of water or such alteration of the physical,
chemical and biological properties of water or discharge of sewage into water, or such
harmful effluents injurious to public health, into water.

Sources of Water Pollution:

Dumping of industrial effluents (sewage, organic matter)

Pesticides
Fertilizers
Waste material dumped in wells, rivers, canals, etc.
Industrial wastes
Dumping sewage water without treatment.

Pollutants released by various industries:

Tanneries (due to soaking, pickling, tanning, finishing)

Textile Industries (dyes, suspended solids, pigments)
Distilleries (organic matter, air polluting stink)
Fertilizers ((Harmful chemicals like salts, acids, amines, arsenic, fluorides, phosphates,
carbon particles)
Steel Mills (Coke oven, blast furnace, scrubbing, pickling wastes, etc.)
Oil Refineries (Acids, hydrogen sulphides, ammonia, alkalis, air/water effluents)
Drugs and Pharmaceuticals (Drug wastes and various harmful chemicals and gases)

Sugar (Biological oxygen content and cane waste, etc.)

Treatment of Air Pollutants:

Mechanical separation
Electrostatic precipitators
Filtering (Fibrous materials)
Scrubbing

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Treatment of water Pollutants:

Primary Treatment (Mechanical means like filtering to release in drains, sewages)

Secondary Treatment (Removal of pollutants like proteins, carbohydrates and fats which
can not be treated though primary treatment).

Tertiary Treatment (Some chemicals, detergents, pesticides etc. need this sort of chemical
treatment like oxidation, etc.)
Projects concerned
The projects may be proposed by a public or private person.
An assessment is obligatory for certain projects. These include:
dangerous industrial facilities such as oil refineries, nuclear fuel or nuclear waste
treatment facilities, integrated chemical installations;
power stations of more than 300 megawatts or nuclear power stations;
transport infrastructure such as railways, airports, motorways, inland waterways and ports
when the infrastructure exceeds certain specific thresholds;
waste and water treatment facilities;
large mining facilities (large quarries, large gas or oil rigs);
water transport or storage facilities, and dams;
installations for the intensive rearing of poultry or pigs which exceed certain specific
thresholds.
Other projects are not automatically assessed: Member States can decide to subject them to
assessment on a case-by-case basis or according to thresholds, certain criteria (for example size),
location (sensitive ecological areas in particular) and potential impact (surface affected,
duration). This particularly concerns projects in the following fields:
agriculture, forestry and aquaculture (for example agricultural irrigation projects or
intensive fish-farming);
the mining industry (underground mining, deep drillings, etc.);
industrial facilities for generating, transporting and storing electricity;
the production and processing of metals (cast iron or steel, shipyards, etc.);
the mineral industry (distillation of coal, cement production, etc.);
the chemical industry (production of pesticides, pharmaceutical products, paints, etc.);
the food industry;
textile, leather, wood, paper and rubber industries;
infrastructure projects (shopping centres, car parks, elevated and underground railways,
etc.);
tourism or leisure projects (ski-runs and ski lifts, holiday villages, theme parks, etc).

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Information required and consultation of interested parties

The developer (the person who applied for development consent or the public authority which
initiated the project) must provide the authority responsible for approving the project with the
following information as a minimum:
a description of the project (location, design and size);
data required to assess the main effects of the project on the environment;
possible measures to reduce significant adverse effects;
the main alternatives considered by the developer and the main reasons for this choice;
a non-technical summary of this information.
With due regard for rules and practices regarding commercial and industrial secrecy, this
information must be made available to interested parties sufficiently early in the decision-making
process:
the competent environmental authorities likely to be consulted on the authorisation of the
project;
the public, by the appropriate means (including electronically) at the same time as
information (in particular) on the procedure for approving the project, details of the authority
responsible for approving or rejecting the project and the possibility of public participation in the
approval procedure;
other Member States, if the project is likely to have transboundary effects. Each Member
State must make this information available to interested parties on its territory to enable them to
express an opinion.
Reasonable time-limits must be provided for, allowing sufficient time for all the interested
parties to react. These opinions must be taken into account in the approval procedure.
Result of the assessment procedure and consultations
At the end of the procedure, the following information must be made available to the public and
transmitted to the other Member States concerned:
the approval or rejection of the project and any conditions associated with it;
the principal arguments upon which the decision was based after examination of the
results of the public consultation, including information on the process of public participation;
any measures to reduce the adverse effects of the project.
Environmental Laws in India:
The main laws are:
The water (Prevention & Control of Pollution) Act, 1972.
The Air (Prevention & Control of Pollution) Act, 1981.
The Environmental (Protection) Act, 1986.
Environmental Impact Assessment (EIA) of Projects:

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EIA is the study of environmental impact of projects. It identifies, predicts and interprets and
communicates about the impact of a project on the health and well being of humans.

Project Appraisal
The assessment of the viability of a project involving medium or long-term investments in terms
of shareholder wealth may be termed as project appraisal. In our country the all-India level
financial institutions have devised an in house policy of assessing the industrial projects to grant
financial assistance based on their commercial, technical, economic and financial viability.
The various aspects of Project Appraisal are:
1.
2.
3.
4.
5.
6.
7.

Basic Eligibility for Financial Assistance

Market Appraisal
Technical Appraisal
Financial Appraisal
Economic Appraisal
Entrepreneur/Promoter Appraisal
Management/Organization Appraisal

1. Basic Eligibility for Financial Assistance

The basic eligibility for financial assistance to any company is being considered on following
parameters:

Constitution of Firm/Company
Priority/Government Policy
Institutional Policy Decisions
Acceptability of the Promoters by the Financial Institutions.

2. Market Appraisal
For appraising the market of product or services from project are being decided on the basis of
following factors:
Assessment of Potential Demand (Demand-Supply Gap).
Study on Trends of Production, Supply, Imports, Exports, Price Trends, Distribution and
Sales Promotion, Government Policies, Competition, Consumer Profile, etc.

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 Methods of Demand Forecasting viz. Trend Projection, End Use, Econometric Methods.
Problems in Demand Forecasting in Collection of Data, Methods of Forecasting and
Environmental Changes.
3. Technical Appraisal
Any project requires technical appraisal for its viability and feasibility in the region where it is
proposed to and on the basis of kind of technology required for the project. We need to consider
following points:

Location ad Site
Plant Capacity and Product-Mix
Technology and Technical Know-how
Selection and Procurement of Plant and Machinery
Civil and Structural Work
Charts and Lay-Outs
Raw Materials, Consumables and Utilities
Implementation Schedule

4. Financial Appraisal
Having estimated the profitability figures a financial analyst would be interested to find the
financial viability of a project. The financial appraisal of any project involves following step:

Estimation of Cost of Project

Means of Financing
Profitability Projections and Assumptions thereof
Cash Flow and Balance Sheet Projections
Ratio Analysis
Analysis of Past Working Results, Financial Position and Sources and Application of
Funds
5. Economic Appraisal
Economic analysis of any project is very important as to derive the actual benefit from the
projects in terms of following factors:

Cost-Benefit Analysis
Domestic Resource Cost
Effective Rate of Protection
Employment Potential
Productivity and Investment per Worker

6. Entrepreneur/Promoter Appraisal

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Capabilities of promoters is also important in appraisal of any project as it is required to

understand the motives of promoter.
Background, Qualifications and Experience
Financial Resourcefulness
Managerial Competence, Past Track Record and Dealings with Institutions/Banks
7. Management/Organization Appraisal

Management Set-Up
Organizational Set-Up
Recruitment and Selection of Executives
Training

Appraisal Criteria (Capital Budgeting - IRR & NPV etc.)

A company before selecting to implement a project gets the feasibility study carried out if the
project is viable in financial terms. Obviously, the company must have carried out the technical
and market analysis. The prime objective of the capital budgeting is to see if the projected cash
flows of the company yield a return which is higher than the expected return. What is the
expected return? It is a subjective question and the figure has to be arrived at by the promoter of
the project / company. He may take various parameters into considerations like; what are the
expectations of the investors in equity, what is the current lending rate of the banks, and the
financial institutions and what is the average lending rate of the banks, and the financial
institutions and what is the average return on the capital employed in that kind of industry? One
can source the data from the various magazines and journals on economic and finance published
by Government of India.
Cash Accruals
Every company sells the product and earns some income from it. However, this income is taxed
after allowing the various permissible deductions. Many deductions which are permitted are of
non-cash flow items like depreciation and the preliminary expense. Thus, one should be
conversant with the various provisions of the relevant sections of the Income Tax Act 1961.
There are certain deductions which are permissible under the said Act, the main objective of
these deductions to reduce the effective rate of taxation of the company. However, it should be
clear that there is a difference between the net profit and the cash flows. The terms used for
estimating/evaluating the cash flows are gross cash accruals and net cash accruals.
Gross Cash Accruals = P.A.T. + Non Cash flow Items
P.A.T. = Profit after Tax
Non Cash flow Items = Depreciation & Preliminary expenses w/off

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Net Cash Accruals = P.A.T. Dividend + Non Cash flow Items

In case, the company does not declare dividend during a particular year the gross cash flows and
the net cash flows will be equal.
Techniques and methods used for evaluation of projects:
Once the relevant information about the project is gathered the techniques of capital budgeting
are employed to judge the attractiveness of the proposals. The end result will tell whether to
accept or reject the proposals. The capital budgeting employs the following four kinds of
techniques:
Accounting Rate of Return (ARR)
Payback Period (PBP)
Net Present Value (NPV)
Internal Rate of Return(IRR)
Benefit Cost Ratio (BCR) or Profitability Index (PI)
Accounting Rate of Return or Average Rate of Return (ARR):
ARR is defined as the ratio of Average Profit after Tax to the Average Book Value of the
Investment. The higher the ARR, the better is the project. Project having less than a predetermined cut off rate of return, say, 15% or 20%, are rejected.
Payback period method:
The payback period is the method under which we find out the number of years required to
recover the initial outlay. Thus lower the payback period, higher would be the attractiveness of
the project.
The two widely used methods of discounted cash flow techniques are:
Net Present Value (NPV)
Internal Rate of Return (IRR)
Benefit Cost Ratio (BCR) or Profitability Index (PI)

Net Present Value (NPV) Method:

Under the NPV Method, the cash flows are discounted at the rate which we call as the expected /
required rate or cost of capital and the NPV is evaluated with the help of the following equation:

120

n
At
NPV = - I, t= 1, 2, 3, ------------n
t=1 (1 +r) t
where, At refers to cash flow at the end of year t, r = Discount rate, n = Life of the project in
number of years, and, I = Initial Investment.
The IRR Method:
The Internal Rate of Return (IRR) can be defined as the rate of return at which the sum of future
cash inflows, when discounted, is equivalent to the initial outlay or the net present value is zero.
This can be represented as:
n

At
I = ,
t= 1, 2, 3, ------------n, where r = IRR
t=1 (1 +r) t
I = Initial Investment/Outlay
This method has the following distinct advantages:
It takes into account the quantum of the cash outflows
It takes into account the total amounts of the cash inflows and the timings.
Benefit Cost Ratio (BCR)/ Profitability Index (PI):
It is the ratio of the present value of the future cash flows and the initial outlay. It is a relative
method and not an absolute method. It is useful for comparing two or more projects in terms of
their acceptability or profitability. Mathematically it is expressed as:

n
At

t=1 (1 +k) t
BCR = PI = , where, k = Discount Rate
I
In case the required rate of return exceeds IRR, the proposal would be rejected under IRR
method. Likewise, if the expected return exceeds the IRR, we would get negative NPV, hence
the project will again be rejected on the NPV basis. Hence under both the methods we would not
accept the project. Thus both the methods give us similar results so far as the appraisal criterion
for the investment in a project is concerned, except when the initial cash outlays are different and
the timings of the cash flows also differ.
Cash Flows Relating to Equity:
The equity-related cash flow stream reflects the contributions made and benefits receivable by
equity shareholders. It is divided into 3 components:

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 Initial Investment: Equity funds committed to the project

Operating Cash Flows: PAT Pref. Dividend + Depn. + Other Non-Cash charges
Terminal Cash Flow: Net Salvage Value of (FA + CA)
- Repayment of Term Loans -Redemption of Pref. Capital - Repayment of Working
Capital Loans
- Retirement of Trade Credits and Other dues, if any.
2. Cash Flows Relating to Long-Term Funds:
Initial Investment: Long Term funds committed to the
Project i.e. Fixed Assets + Working Capital Margin
Operating Cash Flows: PAT + Depreciation.
+ Other Non-Cash charges + Int. on Term Loons (1-TR)
Terminal Cash Flow: Net Salvage Value of FA + Net
Recovery of Working capital Margin
Note: TR = Tax Rate
3. Cash Flows Relating to Total Funds:
Initial Investment: Total Outlay of the Project i.e. Fixed Assets + Current Assets
Operating Cash Flows: PAT + Depreciation. + Other Non-Cash charges
+ Int. on Long-Term Loans (1-TR) + Int. on Short-term Loans (1-TR)
Terminal Cash Flow: Net Salvage Value of FA + Net Salvage Value of Current Assets
Problem:
IDBI is evaluating an electronics project for which the following information is available:
1. Cost of the project is Rs.50 Mn consisting of Fixed Assets of Rs.30 mn and Current Asset
of Rs. 20 Mn. The project will be financed by way of equity of Rs.15 Mn, Term Loans of
Rs.20 Mn, Working capital loans from banks of Rs. 10 Mn and Trade credits of Rs. 5
Mn.
2. The Term Loan is repayable in 5 equal annual installments commencing at the end of
first year. The levels of bank finance and trade credits will remain at Rs.10 Mn and Rs. 5
Mn each till they are paid back at the end of five year.
3. Interest on term loan and bank finance will be 15% and 18% respectively p.a.
4. The expected revenues from the project will be Rs.60 Mn per year. The operating costs
excluding depreciation will be Rs.42 Mn per annum. The depreciation rate on fixed assets
will be 33 1/3% as per WDV method.
5. The net salvage value of fixed assets and current assets at the end of year 5 will be Rs. 5
Mn and rs.20 Mn respectively.
6. The tax rate applicable will be 50%.

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Find Net Cash Flows relating to (a) Equity, (b) Long-term Funds and (c) Total Funds.
Solution:
a. Net Cash Flows Relating to Equity Funds:
(Rs. Million)
0

(15.00)

2. Revenues

60.00

60.00

60.00

60.00

60.00

3. Operating costs

42.00

42.00

42.00

42.00

42.00

4. Depreciation

10.00

6.67

2.96

1.98

5. Intt on W.C. Loans

1.80

6. Intt on Term Loans

3.00

2.40

1.80

1.20

0.60

7. PBT

3.20

7.13

9.96

12.04

13.62

8. Tax

1.60

3.57

4.98

6.02

6.81

9. PAT

1.60

3.56

4.98

6.02

6.81

10. Pref. Dividend

11. Net Salvage Value of

FAs

5.00

12. Net Salvage Value of

CAs

20.00

13. Repayment of TLs

4.00

4.00

4.00

4.00

4.00

14. Redemption of Pref.

10.00

Years
1. Equity (Initial Invst.)

1.80

4.44
1.80

1.80

1.80

Capital
15. Repayment of W C.

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Loans from Banks

16. Retirement of Trade

5.00

17. Initial Investment (1)

(15.00)

18. Operating Cash In-

11.60

10.23

9.42

8.98

8.79

(4.00)

(4.00)

(4.00)

(4.00)

6.00

(15.00)

7.60

6.23

5.42

4.98

14.79

Credits

Flows (9-10+4)
19. Terminal Cash
Flows(11+12-13-14-1516)
20. Net Cash Flow
(17+18+19)

b. Net Cash Flows Relating to Long-Term Funds:

(Rs. Million)
0

Years
1. Fixed Asets

(30.00)

2. W.Capital Margin

(5.00)

3. Revenues

60.00

60.00

60.00

60.00

60.00

4. Operating costs

42.00

42.00

42.00

42.00

42.00

5. Depreciation

10.00

6.67

2.96

1.98

6. Intt on W.C. Loans

1.80

7. Intt on Term Loans

3.00

2.40

1.80

1.20

0.60

8. PBT

3.20

7.13

9.96

12.04

13.62

9. Tax

1.60

3.57

4.98

6.02

6.81

1.80

4.44
1.80

1.80

1.80

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10. PAT

1.60

3.56

4.98

6.02

6.81

11. Net Salvage Value of

FAs

5.00

12. Net Recovery of W.C.

Margin

5.00

13. Initial Investment (1+2)

(35.00)

13.10

11.43

10.32

9.58

9.09

(35.00)

13.10

14. Operating Cash InFlows [10+5+7(1-T)]

15. Terminal Cash

10.00

Flows(11+12)
16. Net Cash Flow

11.43

10.32

9.58

19.09

(13+14+15)

c. Net Cash Flows Relating to Total Funds:

(Rs. Million)
0

(50.00)

2. Revenues

60.00

60.00

60.00

60.00

60.00

3. Operating costs

42.00

42.00

42.00

42.00

42.00

4. Depreciation

10.00

6.67

2.96

1.98

5. Intt on W.C. Loans

1.80

6. Intt on Term Loans

3.00

2.40

1.80

1.20

0.60

7. PBT

3.20

7.13

9.96

12.04

13.62

8. Tax

1.60

3.57

4.98

6.02

6.81

9. PAT

1.60

3.56

4.98

6.02

6.81

Years
1. Total Funds (Investt.)

1.80

4.44
1.80

1.80

1.80

125

10. Net Salvage Value of

FAs

5.00

11. Net Salvage Value of

CAs

20.00

12. Initial Investment (1)

(50.00)

13. Operating Cash In-

14.00

12.33

11.22

10.48

9.99

(50.00)

14.00

Flows [9+4+6 (1-T)

+5(1-T)]
14. Terminal Cash

25.00

Flows (10+11)
15. Net Cash Flow

12.33

11.22

10.48

25.99

(12+13+14)

Risk Analysis
Risk in projects manifests itself as the variability of cash flows. But from where that risk come
from? All will be discussed in this part and will follow various methods of measuring risk. In
capital budgeting, the basic assumption is that the proposals do not involve any risk (business
risk), but it seldom happens. Decisions are made on the basis of forecasts which depend upon
events whose occurrence cannot be anticipated with absolute certainty because of economic,
social, fiscal, political and other reasons. The risk is linked with business decisions.
Risk is a situation where the possible events are known, but which of those will actually happen
is not known. However, the probability of their occurrence can be determined. We can use the
term risk to mean that though it is known how much the cash flows are likely to be, we can
express their realizability only through a probability distribution.
Risk is the variability that is likely to occur in future between the estimated and actual returns.
Risk and Uncertainty:

126

A Risk situation is one in which the probabilities of particular event occurring are known. An
Uncertainty Situation is one where these possibilities are not known.
Investment Appraisal is a methodology for calculating the expected returns based on cash flow
forecasts of many project variables, often inter-related. Risk emanates from the uncertainty
encompassing these project variables. The evaluation of risk depends upon:(i) Our ability to identify and understand the nature of uncertainty surrounding the key project
variables.
(ii) Having tools and methodology to process its risk implications on the returns of the project.
Risk is a situation where the possible events are known, but which of those will actually happen
is not known. However, the probability of their occurrence can be determined. In capital
investment decisions, we can express the realizability of cash flows only through a probability
distribution.
Types of Risks in CI Decisions:
A. Business Risk: It is the variability of the earnings due to changes in the firms normal
operating conditions. It has its origin in the impact of the changing economic
environment on the firms activities and the managements decisions on the capital
intensity of the operations. Business Risk is the variability of the EBIT and is
unconnected to the financial risk. Business Risk can be sub-divided into 2 types of risks
viz.
(i) Investment Risk: It is the variability in the earnings due to variations in inflows
and outflows of cash resulting from the capital investments made by the firm. These
variations arise due to errors in the judgment of or unexpected changes in the market
acceptance of the product or service of the firm, unforeseen technological changes
and changes in the cost structure.
(ii) Portfolio Risk: It is the measure of the variability of the earnings caused by the
diversification achieved by the firm in its operations and asset portfolio. This can be
reduced by investing in the projects or acquiring other firms which have negative
correlation with the earnings of the firm.
B. Financial Risk: It is the variability of the after tax earnings or the EPS of the firm
caused by the financial structure or more precisely, the debt content in the capital
structure. It is the impact of the efficient use of the long-term capital on the earnings of
the firm.
Measures of Risk:

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The statistical measures of dispersion are the most useful ones to gauge the extent of variation in
the cash flows. There are basically two types of such measures:
A. General Techniques:
1. Risk Adjusted Discount Rate (RADR)
2. Certainty Equivalent Co-efficient (CEC)
B. Quantitative Techniques:
1. Range
2. Mean Absolute Deviation (MAD)
3. Variance / Standard Deviation (SD)
4. Co-efficient of Variation (COV)
5. Sensitivity Analysis (SA)
6. Simulation Analysis(SIA)
7. Scenario Analysis (SCA)
8. Decision Tree Analysis (DTA)
A. General Techniques:
1. Risk Adjusted Discount Rate (RADR)
This is based on the assumption that investors expect a high rate of return on risky projects
compared to less risky projects.
Procedure:
Determine the risk free rate (This is the rate at which future cash flows should be
discounted had there been no risk.
Find risk premium (extra return expected over normal returns)
Find NPV with composite discount rate (normal rate plus risk premium) which takes
into account both time and risk factors. A higher discount rate will be used for more
risky projects and lower discount rate for less risky projects.
n
At
NPV = ------------,
t=1,2,3,..n.
t
At = Cash flows without risk adjustment
t=1 (1+k)
k = Risk adjusted discount rate
and

k= i+p, where, i = risk-free rate and p=Premium

This method incorporates the risk averse attitude of the investors. But the determination of
appropriate discount rate is arbitrary. It is adjusted and not the required rate of return. It results in
compounding of risk over time, since premium is added to discount rate. It assumes that
investors are averse to risk. But there are some risk seekers also.
2. Certainty Equivalent Co-efficient (CEC)

128

In this method, the estimated cash flows are reduced to conservative level by
applying a correction factor termed as CEC.
Risk-less Cash flows (Certain cash flows)
CEC = ------------------------------------------------------Risky cash flows (Uncertain cash flows)
Risk-less cash flows are which management is ready to accept if no risk is involved.
Exp. Management expects a cash flow of Rs.20,000. The project is risky, but it expects at least a
cash flow of Rs.12,000. It means CEC = 12000/20000 = 0.6. Here,
n
t At
NPV = ------------,
t=1 (1+i)t

t=1,2,3,..n.
At = Cash flows without risk adjustment

t = CEC or risk adjustment factor

i = Risk-free rate assumed to be constant for all periods.
This method explicitly recognizes risk. But the procedure for reducing cash flows is implicit and
inconsistent from investment to investment. Forecaster may inflate in anticipation of reduction.
By focusing on gloomy outcomes, some good investments may be ignored.
B. Quantitative Techniques:
(i) Range (Rg): Rh Rl,
Where, Rh = Highest value of Distribution
Rl = Lowest value of the Distribution
It measures the variation between the highest and the lowest value of the distribution and is a
rough measure of variability.
(ii)

Mean Absolute Deviation (MAD):

n
_
MAD = Pi RiR ,
i=1
Where,
Pi = Probability of i th value
Ri = i th value of variable

_
R = Arithmetic Mean
MAD shows the variability of the values without regard to the sign of variation.
(iii) Variance and Standard Deviation:

129

The square root of variance is called the standard deviation (SD). These are the measures of
how well the expected values or mean returns represent the distribution. The higher the SD,
lower is the utility of the mean as high SD indicates the value scattered in a greater area
around the mean.
n
Variance = Pi ( Ri R)2 ,
i=1
n
SD = [ Pi ( Ri R)2 ](-1/2)
i=1
4. Coefficient of Variation (COV):
It measures the risk borne per unit of return. That is, the amount of risk as represented by
the standard deviation for each unit of expected return. It is a relative measure and is
given by:
COV = Standard Deviation/ Mean
5. Sensitivity Analysis (SA):
In SA, the factors that are likely to change during the life of the project are first identified
and the extent of change in the NPV or other criterion is chosen for evaluation with
change in the factors. The changes are measured in percentages. SA provides information
on the extent to which the project remains viable under different situations, or, the extent
of change in the variables that will be tolerated by the project.
This answers questions like What will be NPV if sales drop to 50000 units compared to 70000 units?
What will be NPV if economic life of project is only 5 instead of 7 years?
Sometimes it provides cash flows under 3 assumptions; (i) Pessimistic; (ii) Most likely; ad (iii)
Optimistic. It explains how sensitive the cash flows are under these 3 different situations. The
larger the difference between the pessimistic and optimistic cash flows, the more risky is the
project. The limitation is that this method does not provide chances of occurrence of each of
these estimates.
Procedure:
1. Set a relationship between basic factors like quantity sold, unit price, life of
project, etc. and NPV
2. Estimate range of variation - say 5% or10%.
3. Study the effect of variation on NPV in the basic variables.

130

Example
A Ltd is planning to replace its old belt manufacturing machinery with new machinery, which
costs Rs.10 crore and A Ltd expects to dispose off its old machinery for Rs.2 crore. The new
machinery is expected to cut down manufacturing costs from Rs.80 a belt at present to Rs.40
a belt. The fixed costs are Rs.40 lakhs per year. The new machinery will have an economic life
of 10 years and depreciation will be by Straight Line method. At the end of the economic life,
the new machinery can be sold off for 10% of its acquisition cost. The selling price of the belt
is Rs.100 and the cost of capital is 12%. A Ltd feels that its expected sales (no. of belts) and
manufacturing cost per belt are likely to vary, due to changes in business environment, as
follows:-

Particulars

Pessimistic

Expected

Optimistic

Expected sales (No, of belts)

4,00,000

5,00,000

7,00,000

Mf. Cost per belt (Rs. Per

belt)

60

40

30

Conduct a sensitivity analysis ignoring taxes.

Solution:
The relationship between NPV and its variables is given by:
n
[Q (P-V)-F-D] [1-T]+D
S
NPV =
---------- +
-I
t
n
t=1
(1+k)
(1+k)
Substituting values for different variables, i.e. P=Rs.100; V=Rs.40; F=Rs.40,00,000;
D=Rs.90,00,000;
T=0%;
k=12%;
I=Rs.8,00,00,000
(10,00,00,000-2,00,00,000
);
S=Rs.1,00,00,000 and n = 10 years, we get,
10 [Q (100-V)-40,00,000-90,00,000] [1-0]+90,00,000
---------------------------------------t
t=1
(1.12)
1,00,00,000
+
---- - 8,00,00,000,
(1.12) 10
Which, on simplification, will be,
NPV =

131

[Q (100-V) 40,00,000
NPV =
---------- - 7,67,80,000
t=1
(1.12) t
A. Sensitivity Analysis by varying Quantity Sold:
10

(i)

When sales are 4,00,000 belts:

[4,00,000 (100-40) 40,00,000

-------------------- - 7,67,80,000
t
t=1
(1.12)
=2,00,00,000 PVIFA (12%,10) - 7,67,80,000
10

NPV =

=2,00,00,000 (5.650) - 7,67,80,000

=Rs. 3.622 crore

(ii)

When sales are 5,00,000 belts:

[5,00,000 (100-40) 40,00,000

NPV =
-------------------- - 7,67,80,000
t=1
(1.12) t
=2,60,00,000 PVIFA (12%,10) - 7,67,80,000
10

=2,60,00,000 (5.650) - 7,67,80,000

= Rs. 7.012 crore
(iii) When sales are 7,00,000 belts:
[7,00,000 (100-40) 40,00,000
NPV =
-------------------- - 7,67,80,000
t
t=1
(1.12)
=3,80,00,000 PVIFA (12%,10) - 7,67,80,000
10

=3,80,00,000 (5.650) - 7,67,80,000

= Rs. 13.792 crore
NPV at different levels of Sales:

Expected sales (No. of belts)

Pessimistic

Expected

Optimistic

4,00,000

5,00,000

7,00,000

132

NPV (Rs.crore)

3.622

7.012

13.792

B. Sensitivity Analysis by varying Mfg. Cost per belt:

(i)
10
NPV =
t=1

If Mfg. Cost per belt is Rs.60:

[5,00,000 (100-60) 40,00,000
-------------------- - 7,67,80,000
(1.12) t

= 1,60,00,000 PVIF A(12%,10) - 7,67,80,000

= Rs.1.362 crore

(ii)

If Mfg. Cost per belt is Rs.40:

10
[5,00,000 (100-40) 40,00,000
NPV =
-------------------- - 7,67,80,000
t
t=1
(1.12)
= 2,60,00,000 PVIFA (12%,10) - 7,67,80,000
= Rs.7.012crore

(iii)

If Mfg. Cost per belt is Rs.30

10
[5,00,000 (100-30) 40,00,000
NPV =
-------------------- - 7,67,80,000
t=1
(1.12) t
= 3,10,00,000 PVIFA (12%,10) - 7,67,80,000
= Rs.9.837 crore
NPVs at different Mfg. Costs per belt:

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Pessimistic

Expected

Optimistic

60

40

30

1.362

7.012

9.837

Mfg. Cost (Rs. per belt)

NPV (Rs.crore)

6. Simulation Approach (SIMU):

In SA, the impact on NPV of change in one of the variables is examined. For studying the
impact of each variable, all other factors have either been assumed to be constant, or their
expected values have been used. If the decision maker wants to know the expected value
of NPV taking into account each possible value of all the factors that affect it, SA method
would not work.
Simulation is an imitation of a real world system using a mathematical model that captures
the characteristic features of the system as it encounters random events in time. It is method of
solving decision making problems by designing, constructing, and operating a model of the real
system.
Procedure:
1.
2.
3.
4.
5.
6.

Specify parameters
Select values at random (Random Number Tables)
Determine NPV corresponding to random values
Repeat for simulated NPVs
Plot frequency distribution
Interpret the results

Example
Shankar Cables Limited (SCL) is considering the risk characteristics of a project. SCL has
identified that the following factors have a bearing on the NPV of the project which are not
subject to much variation and is considered to be constant at the following levels: -

Initial Investment (I)

Rs.500 crore

134

Cost of Capital (k)

10%

Fixed Costs (F)

Rs.250 crore

Depreciation (St. Line)

Rs.50 crore

Tax Rate (T)

40%

Life of the Project (n)

5 years

Salvage Value (S)

Rs.250 crore

The factors, which are expected to vary, and having a bearing on NPV are the Quantity
manufactured (Q), the Price per unit (P) and the Variable cost per unit (V). The
probability distribution of Q, P and V has been defined as follows:-

Value

Probability

Value

Probability

Value

Probability

240

0.10

1.0

0.30

1.0

0.50

280

0.10

1.5

0.20

1.5

0.30

320

0.20

2.0

0.10

2.0

0.20

360

0.30

2.5

0.40

400

0.20

440

0.10

Required:
a. Define the NPV model for the given project.
b. Set up a correspondence between values of exogenous variables and 2-digit random
numbers.
c. Using some two-digit random numbers from the random number table, obtain five (5)
simulated values of NPV and conclude your opinion.
Solution:

135

(a).
n

[Q (P-V)-F-D] [1-T]+D
S
---------- +
-I
t
n
t=1
(1+k)
(1+k)
Submitting the given values of parameters,

NPV =

[Q (P-V) - 250 - 50] [1-0.4] + 50

250
--+
- 500, t=1,2,3,n
t
n
(1+k)
(1+k)

NPV =

0.6Q (P-V)-130
=

250
- 500, t=1,2,3,n

+
(1+k)

(1+k)

(b).

Value

Prob.

Cum. Prob.

2-Digit Random
Nos.

240
280
320
360
400
440

0.1

0.1

00 to 09

0.1

0.2

10 to 19

0.2

0.4

20 to 39

0.3

0.7

40 to 69

0.2

0.9

70 to 89

0.1

1.0

90 to 99

1.0

0.3

0.3

00 to 29

1.5

0.2

0.5

30 to 49

2.0

0.1

0.6

50 to 59

2.5

0.4

1.0

60 to 99

1.0

0.5

0.5

00 to 49

1.5

0.3

0.8

50 to 79

2.0

0.2

1.0

80 to 99

136

(c).

Run 1:

Random Nos.

52

06

50

Value

360

1.0

1.5

NPV = [0.6 x 360 (1.0 1.5) 130] x PVIFA (10%, 5) + 250 x

PVIF (10%, 5) - 500
= [0.6 x 360 (1.0 1.5) 130] x 3.791 + 250 x 0.621 - 500
= -902.26 +155.25 500 = -1247.01
Run 2:
Q

Random Nos.

37

63

28

Value

320

2.5

1.0

NPV = [0.6 x 320 (2.5 1.0) 130] x PVIFA (10%, 5) + 250 x

PVIF (10%, 5) - 500
= [0.6 x 320 (1.5) 130] x 3.791 + 250 x 0.621 - 500

= 598.98 + 155.25 500 = 254.28

Run 3:
Q

Random Nos.

82

57

68

Value

400

2.0

1.5

137

NPV = [0.6 x 400(2.0 1.5) 130] x PVIFA (10%, 5) + 250 x

PVIF (10%, 5) - 500
= [0.6 x 400 (0.5) 130] x 3.791 + 250 x 0.621 - 500
= -37.91 +155.25 500 = - 382.66
Run 4:
Q

Random Nos.

69

02

36

Value

360

1.0

1.0

NPV = [0.6 x 360(1.0 1.0) 130] x PVIFA (10%, 5) + 250 x

PVIF (10%, 5) - 500
= [0.6 x 360 (0) 130] x 3.791 + 250 x 0.621 - 500
= -492.83 + 155.25 500 = -837.58
Run 5:
Q

Random Nos.

98

94

90

Value

440

2.5

2.0

NPV = [0.6 x 440(2.5 2.0) 130] x PVIFA (10%, 5) + 250 x PVIF (10%, 5) - 500
= [0.6 x 440 (0.5) 130] x 3.791 + 250 x 0.621 - 500
= 7.58 + 155.25 500 = -337.17
7. Scenario Analysis (SCA):
In Sensitivity Analysis (SA), we study the changes in the criterion of merit (NPV) with
changes in one of the variables. But if two or more inter-related variables change
simultaneously at the same time, SCA helps in dealing with such scenario. In SCA,
different scenarios are generated and the desirability of the project is studied in each
scenario.

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8. Decision Tree Analysis (DTA):

DTA helps in tackling risky capital investment proposals. DTA is a graphic display of
relationships between a present decision and possible future events, future decisions and their
consequences. The sequence of events is mapped out over time in a flow resembling branches of
a tree. Thus, it is a pictorial representation in the form of a tree which indicates the magnitude,
probabilities and inter-relationships of all possible outcomes. It gives an overall view of all
possibilities associated with the project. But it is an unwieldy and complex method with
increasing life and possible outcomes.
Constructing a Decision Tree:
Definition of the proposal
Identification of alternatives (Purchase a plant, not to purchase a plant, a big one, or a
small one, etc.)
Graphing the decision tree (Shows decision points i.e. cash outlays, decision branches
alternatives)
Forecasting cash flows (Cash flows, probabilities, and expected values displayed)
Evaluating the results (The firm may proceed with the alternatives which are profitable)
Case on Decision Tree Analysis:
Read the case given below carefully and answer the questions:
Peter is considering the three possible ways to invest Rs.2 lakhs he has recently inherited.
Some of his friends are considering financing a Video Game Venture, which could
result in either a major loss or a substantial gain within a year. Peter estimates that
with a probability of 0.6 he will lose all his money or with a probability of 0.4 he will
make a profit of Rs.4 lakhs.
He can invest in some real estate venture being built in the city. Within one year, this
conservative project will produce a profit of at least Rs.20,000, Rs.30,000, Rs.40,000,
Rs.50000, or even Rs.60,000 with probabilities of returns at 0.15, 0.20, 0.25, 0.30 and
0.10, respectively.
Peter can invest in some gilt-edged securities having a yield of 9%
Example:
(i) Construct a decision Tree to help Peter decide how to invest his money.
(ii) Which investment will maximize his expected one year profit?
(iii) How high would the yield of the guilt-edged bonds have to be before Peter would decide to
invest in them?

139

Solution:
1(i)
-Rs.2 lakhs

0.6
0.4

Rs.4 lakhs

Video Game Arcade

0.15
Real Estate

Rs.20,000
0.20

Rs.30,000

0.25
Rs.40,000
0.10

0.30
Rs.50,000

Govt. securities
Rs.60,000

Rs.2 lakhs x 0.09

1(ii).

Expected Value of Video Game:

0.6 x (- 2,00,000) + 0.4 x (4,00,000) = Rs.40,000
Expected Value of Real Estate Venture:
0.15 x (20,000) + 0.20 x (30,000) + 0.25 x (40,000) + 0.30 x (50,000) + 0.10 x (60,000)
= Rs.40,000
Expected value of Government Securities:

140

0.9 x (2,00,000) = Rs.18,000

Thus, investment in Video Game or Real Estate will maximize the expected one-year profit for
Mr. Peter.
1(iii) The yield on the guilt-edged bonds has to be at least 20% before Mr. Peter would invest in
them.

Multiple Projects and Constraints

This deals with:
1. Conflicts in Ranking of Projects by Different Criteria
2. Resolution of conflicts in Ranking
3. Techniques for selection of more than one projects
a. Conflicts in Ranking of Projects by Different Criteria
Reasons for Conflict:
Reinvestment assumption of NPV, which assumes that the cash flows are reinvested at
cost of capital.
Reinvestment assumption of IRR which assumes that the cash flows are reinvested at
IRR itself.
Reinvestment assumption of BCR which assumes that the cash flows are reinvested at the
rate above Fisherian Rate.
b. Resolution of Conflicts and Selection of Projects
1. Size Disparity between cash outflows:
Choose that project with higher NPV if the projects fulfill, if there is no project
dependency, capital constraint, etc.
2. Time Disparity between the cash flows:
Here, calculate the Modified NPV and Modified IRR and choose those projects which
have higher modified NPV or IRR values.
3. Unequal useful project lives:
Here, both time and size disparities are possible. To remove this conflict, we should
use the Equivalent Annual Charge (EAC) method. EAC is the annualized figure of
net cash inflows found out by multiplying the discounted net cash flows by the capital

141

recovery factor (CRF), which is the reciprocal of PV of annuity factor, at the given
discount rate and life of the project). Based on the higher EAC, the project should be
chosen.
ECA of a project = NPV x CRF
4. Capital budget constraints:
In case of capital rationing, if the projects are independent, we can select project we
need to compare the NPVs or IRRs of all the projects and rank them in the
descending order and accept those which fall within the outlay.
A. Feasible Combinations Approach:
Under this, given the capital budget restriction and project interdependence, all the
feasible combinations are to be defied. The feasible combination with the highest NPV is to
be chosen.
B. Mathematical Programming Approach
-

Linear programming Problem (LPP)

Integer Programming Problem (IPP)
Goal Programming Problem (GPP)

LPP:

Maximize:

Xa NPVa
a=1
n

Subject to:

CFat Xa Kt,

( t= 0,1,m)

a=1
and 0 Xa 1
Where, NPVa = Net present value of project a.
Xa

= Amount of project a accepted

CFat = Cash outflow required for project a in period t

Kt = Capital budget available in period t

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Xa, a = 1,2,.n are the Decision Variables.

IPP:
This is similar to LPP only, but it imposes one more requirement that the variables can take on
only integer values. It considers problems which allow only integer numbers. It is useful in
representing projects under capital rationing, and other interdependencies like Mutual
Exclusiveness, Contingency and Complementariness.

Project Financing
The assessment of the viability of a project involving medium or long-term investments in terms
of shareholder wealth may be termed as project appraisal. In our country the all India level
financial institutions have devised an in house policy of assessing the industrial projects to grant
financial assistance based on their commercial, technical, economic and financial viability.
The concept of the lead institution
Till recently, the financial institutions used to select one of them as the lead institution, which
was responsible for carrying out the appraisal of the project and subsequent legal documentation
and the disbursements. Thus, the applicant company was required to interact with this lead
institution only, although, it should keep the other institutions abreast of the latest developments
about the appraisal stages. The company was required to submit the application as per the
requirements. However after the recent increase in the number of non performing assets (NPAs)
the concept of the lead institution has been dropped by the all India financial institutions and
each institution is going ahead with its separate appraisal. Of late, the financial institutions have
slowed down their lending activities pertaining to project finance and banks have been
increasingly participating in term loans.
Every business requires a legal set up to run its business. This is the requirement of the law.
There can be many kinds of business organizations like sole proprietorship concern, partnership
firm, private limited company, public limited company and Government Company.
The Companies Act is a massive piece of legislation that governs the formation, management
and all other aspects of the companies administration. There is no aspect of the company, which
is left untouched by this piece of legislation. The Companies Act is broadly divided into the
following parts for its proper appreciation. It would always be advisable for the project managers
to get acquainted with the various aspects of the companies Act 1956. The various parts of the
act are as below:

143

1. PART I deals with the preliminaries

2. PART IA deals with the Board for Company Law Administration
3. PART II deals with the incorporation of a company and matters identical thereto.
4 PART III deals with the prospectus, and other matters, relating to issue of shares or debentures.
5. PART IV deals with share capital and debentures.
6. PART V deals with registration of charges.
7. PART VI deals with the management and administration.
8. PART VII deals with the winding up of a company.
9. PART VIII deals with application of the Act to companies formed or registered under previous
Companies Law
10. PART IX deals with companies authorized to get registered under this Act
11. PART X deals with winding up of unregistered company.
12. PART XI deals with companies incorporated outside India.
11. PART XII deals with registration offices, officers and fees.
11. PART XIII deals with general aspects.
Subdivision of the Act
On the basis of the above, the Act can further be subdivided into the following categories:

Incorporation of the company

Allotment of shares and the share capital
Membership in the company
Borrowing powers and registration of the charges
Management and administration of the company
Winding up of the company
Miscellaneous aspects

Incorporation of the company

This part of the Act deals with the following aspects related to the company:
Nature and kinds of the companies
Formation of the company
Memorandum of association of the company.
144

 Articles of association of the company

Allotment of shares and the share capital
This part deals with the following aspects related to the companies Prospectus of a company (not applicable to private limited companies).
Shares of a company
Share capital
Membership in the company
This part deals with the acquisition and termination of membership of the company. This aspect
is also applicable to the public limited companies.
Borrowing powers and registration of charges
This deals with the borrowing powers and registration of charges which are to be created over
the fixed assets of the company, which is required to create charges over its moveable and
immoveable assets, if it avails term loans and/or working capital loans from financial institutions
/ banks.
Management and Administration of the company
This deals with the following aspects related to the management of the company:

Directors of the company

Managerial and other personnel
Meetings and resolutions
Dividend, accounts, audit and investigations
Prevention of operation and mismanagement
Compromization, arrangement, reconstruction and amalgamation etc.

Winding up of the company

This may be sub divided into:
Winding up procedures
Conduct of company during winding up
The companies Act 1956 is a consolidated document and contains laws, rules and the guiding
principles as laid down by various course in India and abroad. The Act has significant
component of English law.
Conclusion

145

The business has to be implemented through any one of the four forms of the organization
namely viz. sole proprietorship concern, partnership firm, limited company or Government
Company. It is advisable to run the project, unless it is in the tiny sector through the company
form of the organization, which has many, advantageous like legal entity, perpetual succession
and limited liability of the members. However, every company has to have the capital clause,
object clause, registered office clause and the limited liability clause. The other major provisions
are that this form of the setup works under the overall supervision of the Board of directors. The
Board may appoint the Managing Director for the day to day running of the business. Thus, there
may be a specific line of hierarchy within the business. There may be a case of delegation of
power on account of this hierarchy. The organization structure of the company can be well
structured as compared to the partnership and the sole proprietorship kinds of the setup.
Financing Projects
This part deals with:1. Loan Syndication
2. Islamic Finance
3. Leveraged Leases
4. Equator Principles
5. Securitization of Project Loans
6. Innovative Debt Instruments
Loan Syndication
Loan Syndication is the process of involving numerous different lenders in providing various
portions of a loan. It is mainly used in extremely large loan situations. Syndication allows any
one lender to provide a large loan while maintaining a more prudent and manageable credit
exposure because they aren't the only creditor.
It also mean a group of banks that acts jointly, on a temporary basis, to loan money in a bank
credit (syndicated credit) or to underwrite a new issue of bonds.
A combination of investment banking firms that bid on a new security issue and then sells it if
the bid is successful. The syndicate disbands when the security offering has been completed.
Syndicates are needed to spread the risk and obtain greater financial and marketing resources for
large issues.
Islamic Finance
The core and principles of Islamic banking are derived from Shari`ah rules and the larger value
system embedded in Islam. This includes discouraging forbidden activities such as gambling and
alcohol. The most widely known rule is against usury or riba, the charging of interest. Any form
of concealment, fraud, or attempt at misrepresentation violates the principles of justice and
fairness. More significant is the specific mention of promotion of clarity and public interest. The
basic guideline is captured in the ideal: avoidance of preventable ambiguity and uncertainty, and
do not consume one anothers wealth unjustly, and be aware that lawful gain should only be
through business-based on mutual consent among you, and do not destroy one another.
The first point of difference in an Islamic bank is that the object of the contract should exist,
specific and free of any ambiguity, and of course be permissible under Shariah. So, in effect, the

146

bank cannot lend but make an investment. It cannot be neutral about what the borrower does
with the money. In this sense it is closer to a mutual fund; all the more so because the reward for
the borrower too is given in the same spirit, i.e. he is not a mere lender or depositor, but one who,
as it were, partners the bank in assuming possession of the asset and, therefore, gets a profit share
from it.
This form of banking is, however, of more recent origin and practiced in varying degrees even in
the explicitly Islamic societies. The most complete form of this is found in one of the least
developed economies, Sudan.
Islamic finance forms are still a relatively small niche within the world market of financial
services, although there is already a wide variety amongst them: institutions offering Islamic
financial services, full-fledged Islamic banks, and those with so-called Islamic Windows. Islamic
capital markets, and Islamic Investment Funds, Islamic insurance (life/non-life) and non-bank
financial services such as leasing/finance co; micro-finance have also grown. Mutual funds have
assets totaling $300 bn, and investment funds of about $250 bn assets. Islamic Windows hold
$200 bn, which is small compared to conventional market for funds.
Leveraged Leases
A lease in which the lessor puts up some of the money required to purchase the asset and
borrows the rest from a lender. The lender is given a senior secured interest on the asset and an
assignment of the lease and lease payments. The lessee makes payments to the lessor, who
makes payments to the lender.
Also called lease agreement wherein the lessor, by borrowing funds from a lending institution,
finances the purchase of the asset being leased.
The lessor pays the lending institution back by way of the lease payments received from the
lessee. Under the loan agreement, the lender has rights to the asset and the lease payments if the
lessor defaults.
In this type of lease, Lessor provides an equity portion (20% to 50%) of the equipment cost and
lenders provide the balance on a nonrecourse debt basis. Lessor receives tax benefits of
ownership.
Long-term lease in which Lessor borrows most of the funds to acquire the asset financed from a
third party, usually a bank or insurance co. Lessor makes an equity investment equal to, say, 20%
of equipment original cost, and borrows remaining 80% by issuing non-recourse notes to lenders,
and writes a non cancellable lease for the equipment.
Lessor makes an assignment of the lease and lease rental payments to the lender, who is entitled
to repossess the asset if the lessee happens to default. A leveraged lease is a true lease for tax
purposes, because Lessor, as owner of the asset, is entitled to all of the tax benefits of ownership,
including accelerated depreciation write-offs, deduction of Interest payments on the bank loan,
and Investment Credit if any, for purchase of the asset. Banks write leveraged leases for their
own customers through the leasing subsidiary of a bank holding company.
Equator Principles
The Equator Principles (EP) are a set of environmental and social benchmarks for managing
environmental and social issues in development project finance globally. Once adopted by banks
and other financial institutions, the Equator Principles commit the adoptees to refrain from
financing projects that fail to follow the processes defined by the Principles. The Equator
Principles were developed by private sector banks led by Citi Group, ABN Amro, Barclays and

147

WestLB and were launched in June 2003. The banks chose to model the Equator Principles on
the environmental standards of the World Bank and the social policies of International Finance
Corporation (IFC).
Sixty (60) FIs (April 2008) have adopted the Equator Principles, which have become the de facto
standard for banks and investors on how to assess major development projects around the world.
The Equator Principles represent a significant industry-wide initiative. They were drafted by the
banks in consultation with the IFC, project sponsors, project engineers, and NGOs. While they
have generally been well received, some project sponsors have said they go too far, while some
NGOs say they do not go far enough.
ANZ has adopted the Equator Principles, a set of voluntary standards designed to help banks
identify and manage social and environmental risks associated with the direct financing of large
infrastructure projects such as dams, mining and pipelines.
What are Equator Principles?
The Equator Principles were first established in association with the World Bank's
International Finance Corporation (IFC) in 2003 and since then have been adopted by
nearly 50 banks around the world, covering in excess of 85% of the global project finance
market. The Principles were updated in mid 2006 to reflect the recent revision of the
IFC's Performance Standards, on which the Principles are based.
The Equator Principles are designed to have effect primarily in countries with developing
legal frameworks. They have particular relevance to ANZ as we are a financier of
projects in emerging Asian economies.
By adopting the Equator Principles, ANZ has voluntarily committed to fund only new
projects that can be developed and operated according to sound social and environmental
standards. The Principles are now considered global best practice for ensuring applicable
project finance proposals meet these standards.
The Equator Principles state that the adopting FIs will provide loans directly to projects only
under the following circumstances:
Scope: The Principles (P) apply to projects over USD 10 mn.
P-1: Review and Categorisation of risk of projects
P-2: Social and Environmental Assessment
P-3:Applicable Social & Environmental Standards
P-4: Action Plan and Management System
P-5: Consultation and Disclosure
P-6: Grievance Mechanism
P-7: Independent Review
P-8: Covenants
P-9: Independent Monitoring and Reporting
P-10: Equator Principles adopting Financial Institution (EPFI) Reporting.

Complex Investment Decision under Inflation

Inflation is the complicated problem in investment decision-making process. Inflation is to be
consistently being considered in cash flows and discount rate.

148

Higher inflation is a fact and common feature in developing countries. As the cash flows of an
investment project occur over a long period of time, a firm should usually be concerned about
the impact of inflation on the project profitability. The capital budgeting results will be biased if
the impact of inflation is not correctly factored in the analysis.
Though decision maker recognize inflation but they actually do not consider in the analysis of
capital investment. Generally cash flows are being assumed at unit costs and selling price
prevailing in year zero to remain unchanged. Argument is that as if inflation is there prices can
be increased to cover increasing costs hence the impact on the projects profitability would be
the same if they assume rate of inflation zero.
The problems with above argument are (a) inflation rate is expressed in nominal terms while it is
inappropriate and inconsistent to use a nominal rate to discount cash flows which are not
adjusted for the impact of inflation (b) selling prices and costs show different degrees of
responsiveness to inflation.
We should be consistent in treating inflation, since the discount rate is market determined, and it
is therefore stated in a nominal terms; then the cash flows should also be expressed in nominal
terms. In other words, cash flows should reflect effect of inflation, when they are discounted by
the inflation affected discount rate.

(a) Capital Rationing:

It helps in representing if a project a is completely accepted (Xa = 1) or rejected (Xa = 0). Or Xa
= (0,1).
(b) Mutually Exclusiveness:
It is represented by:
Xa
aA

1, where A is the set of mutually exclusive projects

It implies that 1 is upper limit of projects

(C) Delay in Projects:

If one of the projects, say, X1 or X2 is delayed, the same is indicated as X and the constraint is
expressed as:
X + X1 + X2 1
(d) Contingency:

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If the acceptance of one project is dependent on the acceptance of the other project(s), then one
project is contingent on the other. For example,
XB XD

Here, Project Bs acceptance is based on Project Ds acceptance.

2XL XM + XN (L can be accepted only when M and N are accepted)

(e) Complementariness:
If the acceptance of two projects has favorable influence on the cash flows of another project,
then the two projects are known to be complementary projects. For instance, consider two
projects A and B. Either of them can be accepted independently; however, if both are accepted
together, there may be overall reduction costs and increase in revues if a composite project AB is
selected. Since A, B as well as AB can not be accepted simultaneously, because the latter is a
composite one consisting of A and B, the following constraint is incorporated o represent the
above which is as follows:XA + XB + XAB 1
Each of the techniques presented above is versatile in its own way and should be applied when
the constraints which it can best resolve are obtained.

Social Cost Benefit Analysis (SCBA)

Meaning of SCBA:
SCBA is the methodology developed in economic analysis to evaluate an investment from the
social point of view. In this, the main objective and outcome of a project has to be examined in
the light of national interest. The United Nations Industrial Development Organization (UNIDO)
has developed an approach to calculate the Social Cost and Benefit. This approach is known as
UNIDO approach. In this, there are 5 steps to measure the social benefit. Another measure was
developed by Little Mirrlees. UNIDO measure approach measures costs and benefits in terms of
consumption whereas LM approach measures in terms of uncommitted social income. Indian
Financial Institutions (FIs) have different methods to measure social benefits of a project before
financing it. SCBA is more important in public sector projects than in private sector projects.
SCBA by FIs:
SCBA is carried out by the all-India FIs like IDBI, ICICI and IFCI based on their own
methodology derived from modifying both the UNIDO and the LM methods. It is given below:1. Economic Rate of Return (ERR)
2. Effective Rate f Protection (ERP)

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3. Domestic Resource Cost (DRC)

1. Economic Rate of Return (ERR):
All non-labor inputs and outputs are valued at international prices, as they reflect the true
economic values.
In the case of tradable items for which international prices are directly available,
international prices are used.
Inputs are valued at c.i.f. prices and outputs are valued at f.o.b. prices.
For tradable items whose international prices are not available, social conversion factors
are used. The rupee value of the tradable goods is multiplied by the social conversion factors
to obtain the social values. The rupee value of each good is divided into tradable, nontradable and residual components because the value of goods may contain some inputs that
went into their production which are tradable. The social conversion factors are then applied
to the tradable, non-tradable and residual components of the rupee value of the good to get
the social value of the components. The sum of the social value of the components is taken
as the social value of the good.
2. Effective Rate of Protection (ERP):
Governments of various countries try through various means such as taxes and tariffs, import
and export restrictions, and subsidies, to protect the home industry. ERP gives an idea about
the protection enjoyed by a particular industry and shows the vulnerability of the industry in
competition from overseas if the protection is withdrawn. Its formula, based on value added
(VA) is as follows:-

VA at Domestic prices - VA at World prices

ERP = ----------------------------------------------------------- x 100
VA at World prices
Where, VA = Selling Price net of taxes and duties Traded & Non-traded Input costs.
The traded inputs are valued at both world prices and domestic prices while non-traded inputs
are valued only at domestic prices. The inputs are segregated into tradable and non-tradable on
the following lines.
Raw Materials: These are treated as traded goods. The world prices are estimated at c.i.f.
prices.
Power, fuel, and water: These are treated as non-traded goods except when the cost of
fuel is significant. In such cases, it should be valued at both domestic and world prices.
Repairs and maintenance: Generally a non-traded item, but the value of spares consumed
is considered, at both domestic and world prices.
Selling Expenses: Non-traded item.

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Administrative overheads: They contain 2 components: Labor costs and other expenses.
The labor cost is included in the value added. Therefore, it is not considered. The other
expenses like rent, telephone and telegraph, etc. are treated as non-traded items.
The value added is the difference between the value of the output and the value of the inputs
mentioned above. That is, it is the surplus available for the providers of capital and labor.
2. Domestic Resource Cost (DRC):
It is the spending required in terms of the domestic currency to generate a saving of one unit of
a foreign currency, say, one US dollar.
VA at domestic prices
DRC = --------------------------------- x Exchange Rate
VA at world prices
The amount of VA for computation of DRC is estimated as follows:Domestic

International

Selling Price:
Less: Operation costs
Raw materials
Power, fuel, water
Repairs and maintenance
Admin overheads
Selling expenses
Less: Capital costs
Charge on capital employed
Depreciation

Depreciation on capital equipment is charged at 6%. The value of capital equipment is

bifurcated into imported and indigenous taxes and duties are netted out before charging
depreciation.
The charge on capital employed is computed at 10%. This is applied after breaking down
the value into imported and indigenous components and netting out taxes and duties from
the two components.
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Capital employed is the sum of fixed assets and working capital.

Relationship between ERP and DRC:
One of the two can be calculated from the other using the following relationship:DRC@ = (ERP + 1) Exchange Rate
(Provided there are no capital costs)

Detailed Project Report

It is the primary report for the formulation of the investment proposal. Investment decisions are
taken based on the details incorporated in the study. Thus feasibility is prepared only for the
formulation and investment decision-making. The first step in feasibility study is the needs
analysis. The purpose is to define overall objectives of the system proposed to be designed. The
second and perhaps the most important thing is system identification. This is referred to as
activity analysis.
Feasibility study report contains:
A broad indication of demand and availability of the product
Required sources for the development of the project
Selection of suitable process and technology
Fixation of capacity on the basis of the project
Process description and layout plans for the project
Available facilities

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Evaluation of available facilities

Capital cost
Profitability analysis
Project schedule and schedule control
Design and flow diagrams
After the preparation of feasibility study report has been prepared, it should be submitted to the
experts the concerned departments of operation such as finance, commercial, project etc examine
this. In case of any differences, the feasibility study report is discussed with the experts,
consultants and is modified according to it.
Preparation of Detailed project report:
Preparation of detailed project report is further step in firming up the proposal. When an
investment proposal has been approved on the basis functional report and the proposal is a major
proposal, it would be necessary to detailed project report to firm up the proposal for the capital
cost as well as the various facilities. It includes...
Examination of technological parameters
Description of the technology to be used
Broad technical specification
Evaluation of the existing resources
Schedule plan
General layout
Volume of work
Hence these reports are to be made before investment is made into project. Thus formulation of
investment is based on the studies is made. These can be considered as pre-investment decision.
Detailed project report is prepared only for the investment decision-making approval, but also
execution of the project and also preparation of the plan. Detailed project report additionally
includes that is contents in addition to Feasibility study reports are.
Project description
Planning and implementation of the project
Specifications
Layouts and flow diagrams
Detailed project report is a complete document for investment decision-making, approval,
planning whereas feasibility study report is a base document for investment decision-making.
Detailed project report is base document for planning the project and implementing the project.
The Detailed Project Report (DPR) is the culmination of all the analysis market and demand,
technical and financial; presented in a systematic format, along with other related information
such as the background of the promoters, location of the company, etc. There is no set pattern in

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which DPR has to be presented. The DPR is generally prepared for submission to the financial
institutions.
First we study the model format for the DPR. This is followed by the format of application form
of the All India Financial Institutions.
Contents of DPR
1. General information
a. Name
b. Constitution and Sector
c. Location
d. Nature of industry and product
e. Promoters and their contribution
f. Cost of project and Means of Finance
2. Promoters details
3. Marketing and Selling Arrangements
4. Particulars of the project
a. Product mix and capacity
b. Location and site
c. Plant and Machinery
d. Raw materials
e. Utilities
5. Technical Arrangements
6. Production Process
7. Environmental Aspects
8. Schedule of Implementation
9. Cost of the project
10. Means of Finance
11. Profitability estimates
a. Assumptions
b. Projected income statement
c. Projected balance sheet
d. Projected cash flow statement
12. Appraisal based on profitability estimates
13. Economic Considerations
14. Appendices
a. Estimates of costs of production
b. Calculation of depreciation
c. Calculation of working capital and margin money for working capital
d. Repayment / Interest schedule of term loan and bank finance
e. Calculation of tax
f. Coverage ratios
g. NPV, IRR, etc.
h. Sensitivity Analysis.

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Chapter-2
Analysis & Selection of Project
End Chapter quizzes
1. Market Structure means
(a). The arrangement of various outlets in the market
(b). The classification of the buyers into various strata
(c). The determinants of a products demand in the market
(d). The changes in the size of the market over a period of time
(e). None of the above
2. A moving average is
(a). An example of time series models
(b). An example of cause and effect models
(c). Used when the variable being studied is expected to exhibit a steady trend over time
(d). Both (a) and (c) above
(e)Both (b) and (c) above
3. Income elasticity of demand is given by
(a). The ratios of change in demand to change in income
(b). Ratio of total income to total demand
(c). Ratio of total demand to change in income
(d). Ratio of total income to change in demand
(e). None of the above
4. Which of the following methods is most suitable for forecasting the demand for power in the
country?
(a). Weighted moving average method
(b). Delphi method
(c). Simple regression method
(d). Econometric method

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(e). Exponential and smoothing method

5. Which of the following statement/s is/are true?

a. Choosing an old technology is always better as it is well proved and tested
b. Choosing the technology of recent origin is always highly risky and not preferable
c. If the technology is not modified to suit to the local conditions, it may be a failure
d. It is always better to depend on the collaborators personnel to implement the
technology rather than to train the buyers personnel
e. All of the above
6. Product Layout means
(a). Are most suitable to produce items of mass production
(b). Are not flexible
(c). Consist of arrangement of machinery according to the function it performs
(d). Both (a) and (b) aboce
(e). Both (b) and (c) above
7. Which of the following types of facility layouts is suitable for an industry in which mass production of
identical items is undertaken?
(a). Product Layout
(b). Process Layout
(c). Fixed position layout
(d). Hybrid layout
(e). None of the above
8. Which of the following is not included in the estimation of the cost of project?
(a). Technical know-how fees
(b). Current assets
(c). Working capital requirements financed through bank borrowings
(d). Expences of foreign technicians and Indian technicians abroad
(e). None of the above
9. _________ is the form of direct assistance provided by state level financial institutions to new
projects.

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(a). Risk capital assistance

(b). Equipment finance scheme
(c). Suppliers; line of credit
(d). Bill rediscounting scheme
(e). Underwriting
10. A project requires an initial investment of Rs. 8 crore and provides inflows of Rs. 4 crore every year
for five years. The payback period of the project is:
(a). 5 years
(b). 4 years
(c). 3 years
(d). 2 years
(e). None of the above

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Chapter-3
Project Implementation
S. No.
1
2
3
4
5

Content
Project Organizations
Human Aspects of Project Management
Project Manager
Network Analysis
Resource Allocation and Leveling

Page no.
160
164
168
171
179

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Project Implementation
Till now we have discussed about various project ideas that can be identified and evaluated,
leading to the selection of those projects that are most suitable to the firm. Now we discuss how
to implement a suitable project.
The first step in a projects implementation is to decide on the organizational structure for the
project.

Project Organizations
The organizational structure can be planned when we already have following information:
Identification of staff who work on the project
Identification of departments involved
The existing organizational structure
An organizational structure shows the number of people working at each level of the hierarchy
and their interrelationships. Any organizational structure will work if the people are willing to
make it work. Therefore, choosing a structure that matches with the behavioral pattern of the
employees is the key.
Concept of Organization:
An Organization is a network of structure and relationship. Commonly, the focus of the structure
is the specialization of the human elements of the group.
Characteristics of Organization:
Goal-Oriented
Collection of People
Consists of Structure (division of labor)
Consists of Technology
Has Environment
Has Feedback
Project Organization
When projects are initiated, two issues immediately arise. First, a decision must be made about
how to tie the project to the parent firm. Second, a decision must be made about how to organize
the project itself.
Project Organization consists of:
Designing a Structure
Pulling together Project Team
Establishing Authority and Responsibility relationship
Establishing Project Office
There are four major organizational forms commonly used to house the projects.

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Functional Organization or Traditional Organization

Pure Project Organization
Matrix Organization
Product Organization
Functional Organization or Traditional Organization
Organization structure is broken into different functional units.
The project tasks are performed through functional units.
A project tends to be assigned to the functional unit that has most interest in ensuring its success
or that can be most helpful in implementing it.
Its a hierarchical structure with employees at each level reporting to the next level, with the
exception of those at the top and bottom. Work flows from top to bottom. Authority and
responsibility increases with upward movement in the hierarchy. The number of people at each
level is higher than the level above it.
The divisionalization in this structure is solely based on the functions. The task of the functional
departments became complex and integration of all the activities presented problems.
Functional elements of the parent organization- Administrative home for a project.

Advantages:
There is maximum Flexibility in the use of staffs.
Individual experts can be utilized by many projects
Specialists in the division can be grouped to share knowledge and experience-- Synergistic
solutions to technical problems
Serves as a base of technological, procedural, administrative and overall policy continuity.
Functional division contains the normal path of advancement for individuals whose Expertise is
in the functional area.
Disadvantages:
Lack of Client/Project focus. Focus on unique area of interest.
Decision delay

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No individual is given full responsibility- lack of co-ordination

Tendency to sub optimize the project
Weak motivation for people
Does not facilitate a holistic approach to the project (e.g. Jet air craft/ emergency room in a
hospital cannot be well designed unless designed as a totality.)

Pure Project Organization or Line Staff Organization

The project is separated from the rest of the parent system.
A self- contained unit with its own technical staff/ administration.
In this type of organization, there is a person designated as project manager, and he or she has
staff authority. In the traditional structure, project management function, as we have seen, was
managed by functional staff. This had resulted in either their being overly functional oriented or
lacking the knowledge and abilities, as also the authority to manage the project, as a whole.
The project manager has his own line organization with project authority and responsibility.
The project has its own resources and management.

Advantages:
The PM has full line authority over the project
Project work force directly responsible to the PM
Line of communication- shortened.
Focus on project objective
High motivation
Unity of command Exists
Flexible labor force
Disadvantages:
Duplications of efforts/Inefficient use of resources
Lack of job security

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Stock piling of equipments / Technical expertise

Projectiles (A disease-that creates animosities between parent organization. staff and project
staff)

Matrix Organization
A combination of pure project organization and functional Organization
It is a pure project organization overlaid on the functional divisions of the parent firm.
Project team is assigned from the functional departments.
The PM has overall responsibility

Advantages:
The project is the point of emphasis/ special focus
Availability of entire reservoir of technical talents in the FD
Team identity
Less anxiety about job
Rapid response to client needs
Consistency of policies/ practices/procedures of parent firm
Holistic approach/Balance of resources
Disadvantages:
Power and Authority is balanced. Doubt exists who is in charge
Division of authority and responsibility is complex
Movement of resources from project to project- may foster political infighting among the several
PMs.
Projectile is still a serious disease.
Violates the management principle of unity of command.

Product Organization
In this type of organization, a division is set-up for each product. Within each division, different
departments are set-up for each of the different functions, engineering, manufacturing,, etc. The
task of each division is to manage projects relating to that product. The biggest advantage of this

163

form is that one person, designated as the project manager this form is that one person,
designated as the project manager or program manager who exercises full control over the
project. He assigns work to all the people in the division and also does their performance
appraisal. Because there is only one person to whom the employees report, strong
communication channels develop. The reaction time of the division will also be less. With the
advent of this form of organization, long lead times of the functional organizations have become
bygones. Specialist personal can be maintained for complicated tasks and for new product
development and they need not be shared with others in the organization.
The project manager in this structure reports to either the general manager or the vice-president.
He handles all the conflicts within his division, and also coordinates, in case of necessity, with
other divisions.
Advantages
The project manager is complete authority and can be held accountable for performance.
The line of command is clear as all the employees in the division report to the project
manager only.
Communication channels are strong. Therefore low reaction time.
Flexibility in planning the project as the division need not share all its resources with
other divisions.
Coordination with other divisions is easy as the possibility of conflict is low.
Top level management gets more time for decision-making and strategy formulation.
Disadvantages
Cost of maintaining this structure is very high due to duplication of equipment, skills, etc,
in each division.
Personnel are retained in the division even after their work is complete, adding to idle
resources.
As there are no strong functional groups, technological development suffers.
Low morale of staff due to lack of career opportunities.

Human Aspects of Project Management

Project Management
Concepts and Definition of Management
All organizations carry out various activities to achieve their certain pre-determined goals.
Management helps organizations to achieve goals. Management can be defined as follows:
Management achieves goals by getting the jobs done efficiently and effectively through and with
people by using the means of planning, organizing, staffing, directing and controlling in a
dynamic Environment.

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Management is know- how. Actually it is an art. It consists of skills, practical knowledge,

creativity and result- orientation. Management is a science also because it has an organized
knowledge of principles and techniques. Management is a profession also.
Characteristics of management
Management achieves goals
Management gets the jobs done efficiently and effectively
Management works through and with people
Management is a process comprising planning, organizing, staffing, directing and controlling
Management operates in an environment
Principles of management
Principles are fundamental truths and are essence of management theory. Henry Fayol
propounded 14 Principles of Management, which are universally applicable.
These are:
Division of Work: Principles of specialization. An employee should be assigned only one type
of work to increase output.
Authority and Responsibility
Authority Legitimate power, right to influence others and make decisions
Responsibility Obligations to carry out assigned jobs. It cannot be delegated.
Accountability Answerability for satisfactory performance
Those who exercise authority must assume responsibility.
Unity of command: One employee should have only one boss.
Unity of direction: One head and one plan for a group of activities having the same objective.
Span of management (Scalar chain of command): All employees should be linked with each
other in superior- subordinate relationship.
Subordination of individual interests to general interests
Remuneration: Fair and equitable pay to employees.
Discipline: Obedience and respect for agreement.
Centralization: Highly centralized power structure; decentralization with centralized control.
Order: A place for everything and everything in its proper place.
Equity: Sense of kindliness and justice throughout all levels of scalar chain.
Stability and tenure of personnel: The tenure should be stable.
Initiative: Encourages subordinates initiative.
Esprit de Crops: Union is strength; cohesiveness and team spirit.

Functions of Management
Management is what managers do. Management has certain functions. Various writers have
classified management functions differently. Some of them are as listed below.
i. Henry Fayol (POCCC)
Planning
Organizing
Commanding
Coordinating

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 Controlling
ii. Luther Gullick (POSDCORB)
Planning
Organizing
Staffing
Directing
Coordinating
Reporting
Budgeting
iii. Kast and Rosenzweig (GPAOIC)
Goal Setting
Planning
Assembling resources
Organizing
Implementing
Controlling
For our purpose, the functions of management are:
i. Planning:
Predetermining future
Selection of goals
Discovering alternatives
Choosing the best alternative
Choosing future course of actions
Estimating the cost and resources etc.
ii. Organizing
Defining activities and tasks
Grouping the activities in departments
Designing a structure
Assigning activities to the position and people
Establishment of responsibility and authority
iii. Staffing
Manpower planning
Preparation of an inventory of people available
Job analysis to determine job description
Recruiting, selecting, placing developing, promoting, remunerating and
Retiring Directing (Leading)
Communicating, influencing and motivating people
Concerned with interpersonal aspect of management.
v. Controlling
Establishing standards
Measuring actual performance
Finding and analyzing deviations
Corrective actions.

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Managerial Skills:
Managers need wide variety of skills. These skills can be categorized into:
Technical Skills: Ability to perform a specialized task or function.
Human Skills: Ability to go along and motivate people.
Conceptual skills: Ability to think and analyze and to relate the organization to environmental
forces.

Top Managers have the overall responsibility for the survival, growth and welfare of the
organizations. They should have more conceptual skills. Middle managers subordinate to top
managers. They implement and control plans and strategies developed by top managers. They
are responsible for the activities of lower level managers. It will be better to have all three skills
equally for them. Lower managers subordinate to middle managers. Operating personnel report
to them. They should possess more technical skills than other two skills.
Concept of Project Management
Project management is a system approach for efficient and effective achievement of project
objectives through assignment of total responsibility and accountability to a single project
manager from inception to completion and coordination across functional lines with proper
utilization of planning and control tools
According to Harold Kerzner: Project management is the planning, organizing, directing and
controlling of company resources to complete specific goals and objectives. Project Management
is an alternative to the traditional management models. It is planning, implementing and
controlling of complex and unique projects to achieve results within constraints in a dynamic
environment.

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The main characteristics of Project Management

Objectives-oriented
Change-oriented
Single responsibility center
Multi-disciplined
Requires functional coordination along functional lines.
Requires integrated Planning and Control systems.
Achieves results within the constraints of time, cost and quality.
Key Objectives of Project Management
Any project must meet several objectives. Each objective is made up of many concerns, or
constraints. Project management should have a document that has all of the details of each
concern spelled out.

The Project Manager, His Roles and Responsibilities

The Project Manager
The project manager serves as a single responsibility center to achieve project objective within
the constraints of time cost and quality. His actions make or break the project. He occupies a
focal position in project management. He assumes total responsibility and accountability for the
project from inception to completion.
A project manager must manage key project stakeholders-customers, contractors, consultants,
suppliers, government, labor unions, competitors and financers.

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What a PM should know?

What the priorities are?
What authority he has?
Opportunity and facilities to do the job.
Feedback-to know how he is getting on.
What extent of guidance and support from the superiors?
Recognition for good program.
Skills Requirements of Project Manager
1. Technical skills:
Understanding of the technology involved
Evaluation of technical concepts and solutions
Communication in technical terms
Assessment of technical risks, trends and innovations
2. Managerial Skills
Planning and control skills
Organization skills
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 Decision making skills

Human Resource Management skills
Leadership skills
3. Human Relations skills
Communication skills
Motivation skills
Negotiation and bargaining skills
Conflict management skills
4. Conceptual Skills
They are ability to relate the project to environmental forces. The project manager should
have vision, foresight, judgment and intuition.
5. Team Building skills
They are ability to integrate people from many disciplines and departments into an effective
team.
Roles of Project Manager
1.Diplomat:
Maintain better relationship between project and environment
Ensure political support
Tackle new threats, if any
Have high level of sensitivity
Good negotiating skill
2.Chief Executive:
Responsible for all action of project personnel
Make things happen by active intervention
Make changes if necessary
Coordinate the team
Controlling and allocating resources
3. Leader
Authority and influence
Define ethics, norms and values of the team
Motivating capacity
Drive- be a leader
Team spirit- team work
Responsibilities of Project Manager
Responsibility is the obligation to perform duties and carry out tasks. It flows from authority. It
cannot be delegated. The specific responsibilities consist of:
i. Defining and maintaining project integrity
ii. Selecting the project team
iii. Identifying and managing stakeholders
iv. Planning the project implementation
v. Project organization
vi. Project implementation
vii. Project control and progress tracking
viii. Financial management
ix. Change and conflict management

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NETWORK ANALYSIS PERT/CPM FOR PROJECT SCHEDULING &

RESOURCE ALLOCATION & LEVELING
INTRODUCTION
Basically, CPM (Critical Path Method) and PERT (Programme Evaluation Review Technique)
are project management techniques, which have been created out of the need of Western
industrial and military establishments to plan, schedule and control complex projects.
Brief History of CPM/PERT
CPM/PERT or Network Analysis as the technique is sometimes called, developed along two
parallel streams, one industrial and the other military.
CPM was the discovery of M.R.Walker of E.I.Du Pont de Nemours & Co. and J.E.Kelly of
Remington Rand, circa 1957. The computation was designed for the UNIVAC-I computer. The
first test was made in 1958, when CPM was applied to the construction of a new chemical plant.
In March 1959, the method was applied to a maintenance shut-down at the Du Pont works in
Louisville, Kentucky. Unproductive time was reduced from 125 to 93 hours.
PERT was devised in 1958 for the POLARIS missile program by the Program Evaluation Branch
of the Special Projects office of the U.S.Navy, helped by the Lockheed Missile Systems division
and the Consultant firm of Booz-Allen & Hamilton. The calculations were so arranged so that
they could be carried out on the IBM Naval Ordinance Research Computer (NORC) at Dahlgren,
Virginia.
Planning, Scheduling & Control
Planning, Scheduling (or organising) and Control are considered to be basic Managerial
functions, and CPM/PERT has been rightfully accorded due importance in the literature on
Operations Research and Quantitative Analysis.
Far more than the technical benefits, it was found that PERT/CPM provided a focus around
which managers could brain-storm and put their ideas together. It proved to be a great
communication medium by which thinkers and planners at one level could communicate their
ideas, their doubts and fears to another level. Most important, it became a useful tool for
evaluating the performance of individuals and teams.
There are many variations of CPM/PERT which have been useful in planning costs, scheduling
manpower and machine time. CPM/PERT can answer the following important questions:
How long will the entire project take to be completed? What are the risks involved?
Which are the critical activities or tasks in the project which could delay the entire project if they
were not completed on time?
Is the project on schedule, behind schedule or ahead of schedule?
If the project has to be finished earlier than planned, what is the best way to do this at the least
cost?
The Framework for PERT and CPM
Essentially, there are six steps which are common to both the techniques. The procedure is listed
below:
I.

Define the Project and all of its significant activities or tasks. The Project (made up of
several tasks) should have only a single start activity and a single finish activity.
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II.
III.

IV.
V.
VI.

Develop the relationships among the activities. Decide which activities must precede and
which must follow others.
Draw the "Network" connecting all the activities. Each Activity should have unique event
numbers. Dummy arrows are used where required to avoid giving the same numbering to
two activities.
Assign time and/or cost estimates to each activity
Compute the longest time path through the network. This is called the critical path.
Use the Network to help plan, schedule, monitor and control the project.

The Key Concept used by CPM/PERT is that a small set of activities, which make up the longest
path through the activity network control the entire project. If these "critical" activities could be
identified and assigned to responsible persons, management resources could be optimally used
by concentrating on the few activities which determine the fate of the entire project.
Non-critical activities can be replanned, rescheduled and resources for them can be reallocated
flexibly, without affecting the whole project.
Five useful questions to ask when preparing an activity network are:
Is this a Start Activity?
Is this a Finish Activity?
What Activity Precedes this?
What Activity Follows this?
What Activity is Concurrent with this?
Some activities are serially linked. The second activity can begin only after the first activity is
completed. In certain cases, the activities are concurrent, because they are independent of each
other and can start simultaneously. This is especially the case in organisations which have
supervisory resources so that work can be delegated to various departments which will be
responsible for the activities and their completion as planned.
When work is delegated like this, the need for constant feedback and co-ordination becomes an
important senior management pre-occupation.
Drawing the CPM/PERT Network
Each activity (or sub-project) in a PERT/CPM Network is represented by an arrow symbol. Each
activity is preceded and succeeded by an event, represented as a circle and numbered.

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At Event 3, we have to evaluate two predecessor activities - Activity 1-3 and Activity 2-3, both
of which are predecessor activities. Activity 1-3 gives us an Earliest Start of 3 weeks at Event 3.
However, Activity 2-3 also has to be completed before Event 3 can begin. Along this route, the
Earliest Start would be 4+0=4. The rule is to take the longer (bigger) of the two Earliest Starts.
So the Earliest Start at event 3 is 4.
Similarly, at Event 4, we find we have to evaluate two predecessor activities - Activity 2-4 and
Activity 3-4. Along Activity 2-4, the Earliest Start at Event 4 would be 10 wks, but along
Activity 3-4, the Earliest Start at Event 4 would be 11 wks. Since 11 wks is larger than 10 wks,
we select it as the Earliest Start at Event 4.We have now found the longest path through the
network. It will take 11 weeks along activities 1-2, 2-3 and 3-4. This is the Critical Path.
The Backward Pass - Latest Finish Time Rule
To make the Backward Pass, we begin at the sink or the final event and work backwards to the
first event.

At Event 3 there is only one activity, Activity 3-4 in the backward pass, and we find that the
value is 11-7 = 4 weeks. However at Event 2 we have to evaluate 2 activities, 2-3 and 2-4. We

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find that the backward pass through 2-4 gives us a value of 11-6 = 5 while 2-3 gives us 4-0 = 4.
We take the smaller value of 4 on the backward pass.
Tabulation & Analysis of Activities
We are now ready to tabulate the various events and calculate the Earliest and Latest Start and
Finish times. We are also now ready to compute the SLACK or TOTAL FLOAT, which is
defined as the difference between the Latest Start and Earliest Start.
Event

Duration(Weeks)

Earliest
Start

Earliest
Finish

Latest
Start

Latest
Finish

Total
Float

1-2

2-3

3-4

11

11

1-3

2-4

10

11

The Earliest Start is the value in the rectangle near the tail of each activity
The Earliest Finish is = Earliest Start + Duration
The Latest Finish is the value in the diamond at the head of each activity
The Latest Start is = Latest Finish - Duration
There are two important types of Float or Slack. These are Total Float and Free Float.
TOTAL FLOAT is the spare time available when all preceding activities occur at the earliest
possible times and all succeeding activities occur at the latest possible times.
Total Float = Latest Start - Earliest Start
Activities with zero Total float are on the Critical Path
FREE FLOAT is the spare time available when all preceding activities occur at the earliest
possible times and all succeeding activities occur at the earliest possible times.
When an activity has zero Total float, Free float will also be zero.
There are various other types of float (Independent, Early Free, Early Interfering, Late Free, Late
Interfering), and float can also be negative. We shall not go into these situations at present for the
sake of simplicity and be concerned only with Total Float for the time being.
Having computed the various parameters of each activity, we are now ready to go into the
scheduling phase, using a type of bar chart known as the Gantt Chart.
There are various other types of float (Independent, Early Free, Early Interfering, Late Free, Late
Interfering), and float can also be negative. We shall not go into these situations at present for the
sake of simplicity and be concerned only with Total Float for the time being. Having computed

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the various parameters of each activity, we are now ready to go into the scheduling phase, using
a type of bar chart known as the Gantt Chart.
Scheduling of Activities Using a Gantt Chart
Once the activities are laid out along a Gantt Chart (Please see chart below), the concepts of
Earliest Start & Finish, Latest Start & Finish and Float will become very obvious.

Activities 1-3 and 2-4 have total float of 1 week each, represented by the solid timeline which
begins at the latest start and ends at the latest finish. The difference is the float, which gives us
the flexibility to schedule the activity.
For example, we might send the staff on leave during that one week or give them some other
work to do. Or we may choose to start the activity slightly later than planned, knowing that we
have a weeks float in hand. We might even break the activity in the middle (if this is permitted)
for a week and divert the staff for some other work, or declare a National or Festival holiday as
required under the National and Festival Holidays Act.
These are some of the examples of the use of float to schedule an activity. Once all the activities
that can be scheduled are scheduled to the convenience of the project, normally reflecting
resource optimization measures, we can say that the project has been scheduled.

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Example
A Social Project manager is faced with a project with the following activities:

Activity-id

Activity - Description

Duration

1-2

Social Work Team to live in Village

5 Weeks

1-3

Social Research Team to do survey

12 Weeks

3-4

Analyse results of survey

5 Weeks

2-4

Establish Mother & Child Health

Program

14 Weeks

3-5

Establish Rural Credit Programme

15 Weeks

4-5

Carry out Immunisation of Under

Fives

4 Weeks

Draw the arrow diagram, using the helpful numbering of the activities, which suggests
the following logic:
Unless the Social Work team lives in the village, the Mother and Child Health
Programme cannot be started due to ignorance and superstition of the villagers
The Analysis of the survey can obviously be done only after the survey is complete.
Until rural survey is done, the Rural Credit Programme cannot be started
Unless Mother and Child Programme is established, the Immunisation of Under Fives
cannot be started
- Calculate the Earliest and Latest Event Times
- Tabulate and Analyse the Activities
- Schedule the Project Using a Gantt Chart

The PERT (Probabilistic) Approach

So far we have talked about projects, where there is high certainty about the outcomes of
activities. In other words, the cause-effect logic is well known. This is particularly the case in
Engineering projects.
However, in Research & Development projects, or in Social Projects which are defined as
"Process Projects", where learning is an important outcome, the cause-effect relationship is not
so well established.
In such situations, the PERT approach is useful, because it can accommodate the variation in
event completion times, based on an experts or an expert committees estimates.
For each activity, three time estimates are taken
The Most Optimistic
The Most Likely
The Most Pessimistic
The Duration of an activity is calculated using the following formula:

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Where te is the Expected time, to is the Optimistic time, tm is the most

probable activity time and tp is the Pessimistic time.
It is not necessary to go into the theory behind the formula. It is enough to know that the weights
are based on an approximation of the Beta distribution.
The Standard Deviation, which is a good measure of the variability of each activity is calculated
by the rather simplified formula:
The Variance is the Square of the Standard Deviation.

PERT Calculations for the Social Project

In our Social Project, the Project Manager is now not so certain that each activity will be
completed on the basis of the single estimate he gave. There are many assumptions involved in
each estimate, and these assumptions are illustrated in the three-time estimate he would prefer to
give to each activity.

In Activity 1-3, the time estimates are 3,12 and 21. Using our PERT formula, we get:

The Standard Deviation (s.d.) for this activity is also calculated using
the PERT formula
We calculate the PERT event times and other details as below for each activity:
Event

to

tm

tp

te

ES

EF

LS

LF

TF

s.d.

Var.

1-3

12

21

12

12

12

3-5

15

30

16

12

28

12

28

16

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1-2

14

11

2-4

14

17

13

19

11

24

3-4

12

17

19

24

4-5

19

23

24

28

Estimating Risk
Having calculated the s.d. and the Variance, we are ready to do some risk analysis. Before that
we should be aware of two of the most important assumptions made by PERT.
The Beta distribution is appropriate for calculation of activity durations.
Activities are independent, and the time required to complete one activity has no bearing
on the completion times of its successor activities in the network. The validity of this
assumption is questionable when we consider that in practice, many activities have
dependencies.
Expected Length of a Project
PERT assumes that the expected length of a project (or a sequence of independent activities) is
simply the sum of their separate expected lengths.
Thus the summation of all the te's along the critical path gives us the length of the project.
Similarly the variance of a sum of independent activity times is equal to the sum of their
individual variances.
In our example, the sum of the variance of the activity times along the critical path, VT is found
to be equal to (9+16) = 25.
The square root VT gives us the standard deviation of the project length. Thus, ST= 5. The
higher the standard deviation, the greater the uncertainty that the project will be completed on the
due date.
Although the te's are randomly distributed, the average or expected project length Te
approximately follows a Normal Distribution.
Since we have a lot of information about a Normal Distribution, we can make several statistically
significant conclusions from these calculations.
A random variable drawn from a Normal Distribution has 0.68 probability of falling within one
standard deviation of the distribution average. Therefore, there is a 68% chance that the actual
project duration will be within one standard deviation, ST of the estimated average length of the
project, te.
In our case, the te = (12+16) = 28 weeks and the ST = 5 weeks. Assuming t e to be normally
distributed, we can state that there is a probability of 0.68 that the project will be completed
within 28 +- 5 weeks, which is to say, between 23 and 33 weeks.

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Resource Allocation and Leveling

One of the major issues in scheduling is resource allocation. Resources include funds, labor,
machine, time, etc. The problem of resource allocation has two aspects: finding the peak level
requirements and trying to arrange the resources so that the project is completed on time, and
adjusting the activities within the available slacks so that the additional resources to be brought
in are keeping cost within limits.
The first issue is known as resource loading and second as resource leveling.
Resource Allocation
We can discuss resource allocation with an example as there is a requirement of cranes in each
unit of time for each activity of the project as shown in table below.

Time Period
0-5
5-10
10-15
15-20
20-25

Requirement
15
4
10
0
14

As can be seen from the

above table the initial
requirement is high,
followed by severe
fluctuations. After the time
block 20-25, it is not
required at all. The project
manager, therefore, has to
ensure that the peak requirement of 15 cranes is available with him by the time the project is
scheduled to start. If he has 15 cranes, he canbe sure that the works do not get stuck due to non
availability of cranes. It should be noted that we are talking about resources such as machinery
and equipment and not about consumables.

Resource Leveling
As we have already seen, the requirement of cranes is fluctuating heavily. Initially, the
requirement is as high as 15 units and falls down to zero in the time block 15-20. If project
manager keeps 15 units all through, he will have a lot of idle resource, pushing up the costs. If
the activities for which the resource is required can be rescheduled without disturbing the critical
path, a part of the costs can be saved.

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Leveling of resource requirements enhances the efficiency of usage of scarce resources. But,
when more resources than one are scarce, or expensive to hold, leveling becomes complex.

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Chapter-3
Project Implementation
End Chapter Quizzes
1.

Traditional form of organization is suitable to

(a) The projects which are characterized by non-routine work

(b) The projects which call for the coordination of different functional areas
(c) The projects which contain a continuous flow of repetitive work
(d) The projects which are dynamic in nature
(e) None of the above
2. Which of the following statement/s is/are true?
(a). By line-staff form of organization an efficient utilization of resources can be achieved
(b). The functional form of organization is not suitable to achieve effective utilization of
resources.
(c). Matrix form of organization is not conducive to achieve effective realization of project
objectives.
(d). Divisional form of organization is suitable for effective utilization of resources.
(e). Line-staff form of organization is suitable for an effective realization of project objectives.
3. Which of the following is not an advantage of traditional form of organization for the
management of projects?
(a). Budgeting and control are easy
(b). It facilitates better technical control
(c). It is easy to integrate the functions of all concerned departments towards the fulfillment of
the project objectives
(d). The lines of communication are well established
(e). It is easy to estimate the staff requirement for each department.
4. In Matrix form of project organization

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(a). The hierarchical principle is ignored

(b). Responsibility and authority are commensurate
. There is dual subordinate
(d). Both (a) and (c) above
(e). All of (a), (b) and (c) above
5. If there is a conflict between the line manager and project manager the staff prefer to
(a). Report to the project manager because e is superior to line manager
(b). Report to the line manager because he is superior to line manager
(c). Report to the general manager avoiding both line manager and project manager
(d). Keep to themselves without reporting to anyone till they are asked to do so
(e). None of the above \
6. The project manager, while selecting the personnel for his project, should
(a). Make sure that existing employees are utilized to the maximum extent
(b). Recruit employees from within the organization as well as from outside
(c). Select and recruit potential external candidates only as new employees always perform
better
(d). Select the internal candidates only as they are already available
(e). Both (a) and (b) above
7. The involvement of top management in project staffing
(a). Is necessary to make the importance it is giving known to all
(b). Is not necessary because it is purely the task of project manager
(c). Is necessary because the project manager may entertain vested interests
(d). May be necessary when things appear to be going wrong
(e). Both (a) and (d) above
8. A critical review of the execution of the project after its completion is called

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(a). Cybernetic control

(b). Go/ No-go control
(c). Post-control
(d). Exception control
(e). None of the above
9. Which of the following is/are true?
(a). The concept of crashing an activity is given both in PERT and CPM models
(b). Both PERT and CPM techniques involve drawing networks showing relationships between
various activities
(c). PERT is more deterministic, while CPM is probabilistic
(d). Floats and slacks are used in both PERT and CPM
(e). Both (b) and (d) above
10. Which of the following statements is/are true with respect to Resource Allocation?
(a). In resource loading the focus is on keeping the costs within the limits
(b). In resource leveling the focus is on meeting the schedule
(c). In resource leveling the focus is on keeping the costs within the limits
(d). In order to meet the schedule the project activities should be adjusted within the available
slacks.
(e). None of the above

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Chapter-4
PROJECT REVIEW AND CONTROL
S. No.
1
2
3
4
5
6

Content
Cost Estimation
Cost Budgeting
Cost Control
Time Control
Performance Evaluation
Project Control System

Page no.
185
187
189
191
192
194

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PROJECT REVIEW AND CONTROL

Once the activities of a project are scheduled and their execution starts, the job of the project
manager is to check whether everything is going on according to the plan or not. He should
obtain information on the progress made to date, compare it with the scheduled progress and
identify negative deviations. Action should be taken to bring back the progress made in line with
the scheduled progress. Control is taking corrective actions to bring the actual performance up to
the level of scheduled performance. Evaluation is a judgment about the quality and effectiveness
of the project.
COST ESTIMATION
Cost estimating involves developing an approximation (estimate) of the costs of the resources
needed to complete project activities. In approximating cost, the estimator considers the causes
of variation of the final estimate for purposes of better managing the project.
When a project is performed under contract, care should be taken to distinguish cost estimating
from pricing. Cost estimating involves developing an assessment of the likely quantitative
resulthow much will it cost the performing organization to provide the product or service
involved? Pricing is a business decisionhow much will the performing organization charge for
the product or servicethat uses the cost estimate as but one consideration of many. Cost
estimating includes identifying and considering various costing alternatives.
For example, in most application areas, additional work during a design phase is widely held to
have the potential for reducing the cost of the production phase. The cost-estimating process
must consider whether the cost of the additional design work will be offset by the expected
savings.

Inputs to Cost Estimating

Work breakdown structure. It is used to organize the cost estimates and to ensure that all
identified work has been estimated.
Resource requirements.
Resource rates. The individual or group preparing the estimates must know the unit rates (e.g.,
staff cost per hour, bulk material cost per cubic yard) for each resource to calculate project costs.
If actual rates are not known, the rates themselves may have to be estimated.
Activity duration estimates. Activity duration estimates will affect cost estimates on any project
where the project budget includes an allowance for the cost of financing (i.e., interest charges).
Estimating publications. Commercially available data on cost estimating.

185

Historical information. Information on the cost of many categories of resources is often available
from one or more of the following sources:
Project filesone or more of the organizations involved in the project may maintain records of
previous project results that are detailed enough to aid in developing cost estimates. In some
application areas, individual team members may maintain such records.
Commercial cost-estimating databaseshistorical information is often available commercially.
Project team knowledgethe individual members of the project team may remember previous
actuals or estimates. While such recollections may be useful, they are generally far less reliable
than documented results.
Chart of accounts. A chart of accounts describes the coding structure used by the performing
organization to report financial information in its general ledger. Project cost estimates must be
assigned to the correct accounting category.
Risks. The project team considers information on risks when producing cost estimates, since
risks (either threats or opportunities) can have a significant impact on cost. The project team
considers the extent to which the effect of risk is included in the cost estimates for each activity.

Tools and Techniques for Cost Estimating

Analogous estimating. Analogous estimating, also called top-down estimating, means using the
actual cost of a previous, similar project as the basis for estimating the cost of the current project.
It is frequently used to estimate total project costs when there is a limited amount of detailed
information about the project (e.g., in the early phases). Analogous estimating is a form of expert
judgment.
Analogous estimating is generally less costly than other techniques, but it is also generally less
accurate. It is most reliable when a) the previous projects are similar in fact and not just in
appearance, and b) the individuals or groups preparing the estimates have the needed expertise.
Parametric modeling. Parametric modeling involves using project characteristics (parameters) in
a mathematical model to predict project costs. Models may be simple (residential home
construction will cost a certain amount per square foot of living space) or complex (one model of
software development costs uses thirteen separate adjustment factors, each of which has five to
seven points on it).
Both the cost and accuracy of parametric models vary widely. They are most likely to be reliable
when a) the historical information used to develop the model was accurate, b) the parameters
used in the model are readily quantifiable, and c) the model is scalable (i.e., it works as well for a
very large project as for a very small one).
Bottom-up estimating. This technique involves estimating the cost of individual activities or
work packages, then summarizing or rolling up the individual estimates to get a project total.
The cost and accuracy of bottom-up estimating is driven by the size and complexity of the
individual activity or work package: smaller activities increase both cost and accuracy of the
estimating process. The project management team must weigh the additional accuracy against
the additional cost.

186

Computerized tools. Computerized tools, such as project management software spreadsheets and
simulation/statistical tools, are widely used to assist with cost estimating. Such products can
simplify the use of the tools described earlier and thereby facilitate rapid consideration of many
costing alternatives.
Other cost estimating methods. For example, vendor bid analysis.
Outputs from Cost Estimating
Cost estimates. Cost estimates are quantitative assessments of the likely costs of the resources
required to complete project activities. They may be presented in summary or in detail.
Costs must be estimated for all resources that will be charged to the project. This includes, but is
not limited to, labor, materials, supplies, and special categories such as an inflation allowance or
cost reserve.
Cost estimates are generally expressed in units of currency (dollars, euros, yen, etc.) to facilitate
comparisons both within and across projects. In some cases, the estimator may use units of
measure to estimate cost, such as staff hours or staff days, along with their cost estimates to
facilitate appropriate management control. Cost estimating generally includes considering
appropriate risk response planning, such as contingency plans.
Cost estimates may benefit from being refined during the course of the project to reflect the
additional detail available. In some application areas, there are guidelines for when such
refinements should be made and what degree of accuracy is expected. For example, The
Association for the Advancement of Cost Engineering (AACE) International has identified a
progression of five types of estimates of construction costs during engineering: order of
magnitude, conceptual, preliminary, definitive, and control.
Supporting detail. Supporting detail for the cost estimates should include:
_ A description of the scope of work estimated. This is often provided by a reference to the
WBS.
_ Documentation of the basis for the estimate; i.e., how it was developed.
_ Documentation of any assumptions made.
_ An indication of the range of possible results; for example, $10,000 $1,000 to indicate that
the item is expected to cost between $9,000 and $11,000.
The amount and type of additional details vary by application area. Retaining even rough notes
may prove valuable by providing a better understanding of how the estimate was developed.
Cost management plan. The cost management plan describes how cost variances will be
managed (e.g., different responses to major problems than to minor ones). A cost management
plan may be formal or informal, highly detailed or broadly framed, based on the needs of the
project stakeholders.
COST BUDGETING
Cost budgeting involves allocating the overall cost estimates to individual activities or work
packages to establish a cost baseline for measuring project performance. Reality may dictate that
estimates are done after budgetary approval is provided, but estimates should be done prior to
budget request wherever possible.

187

Inputs to Cost Budgeting

Cost estimates.
Work breakdown structure. The WBS identifies the project elements to which costs will be
allocated.

Project schedule. The project schedule includes planned start and expected finish dates for the
project components to which costs will be allocated. This information is needed to assign costs to
the time period when the cost will be incurred.
Risk management plan. The risk management plan often includes cost contingency, which can be
determined on the basis of the expected accuracy of the estimate.
Tools and Techniques for Cost Budgeting
Cost budgeting tools and techniques.
Outputs from Cost Budgeting
Cost baseline. The cost baseline is a time-phased budget that will be used to measure and
monitor cost performance on the project. It is developed by summing estimated costs by period
and is usually displayed in the form of an S-curve.
Many projects, especially larger ones, may have multiple cost baselines to measure different
aspects of cost performance. For example, a spending plan or cash-flow forecast is a cost
baseline for measuring disbursements.

188

COST CONTROL
Cost control is concerned with a) influencing the factors that create changes to the cost baseline
to ensure that changes are agreed upon, b) determining that the cost baseline has changed, and c)
managing the actual changes when and as they occur.
Cost control includes:
_Monitoring cost performance to detect and understand variances from plan.
_ Ensuring that all appropriate changes are recorded accurately in the cost baseline.
_ Preventing incorrect, inappropriate, or unauthorized changes from being included in the cost
baseline.
_ Informing appropriate stakeholders of authorized changes.
_ Acting to bring expected costs within acceptable limits.
Cost control includes searching out the whys of both positive and negative variances. It must
be thoroughly integrated with the other control processes (scope change control, schedule
control, quality control, and others). For example, inappropriate responses to cost variances can
cause quality or schedule problems, or produce an unacceptable level of risk later in the project.

Inputs to Cost Control

Cost baseline:
Performance reports: Performance reports provide information on project scope and cost
performance, such as which budgets have been met and which have not. Performance reports
may also alert the project team to issues that may cause problems in the future.
Change request: Change requests may occur in many formsoral or written, direct or indirect,
externally or internally initiated, and legally mandated or optional. Changes may require
increasing the budget or may allow decreasing it.
Cost management plan:

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Tools and Techniques for Cost Control

Cost change control system: A cost change control system defines the procedures by which the
cost baseline may be changed. It includes the paperwork, tracking systems, and approval levels
necessary for authorizing changes. The cost change control system should be integrated with the
integrated change control system.
Performance measurement: Performance measurement techniques, help to assess the magnitude
of any variations that do occur. Earned Value Management (EVM), is especially useful for cost
control. An important part of cost control is to determine what is causing the variance and to
decide if the variance requires corrective action.
Earned value management (EVM:) All EVM Control Account Plans (CAPs) must continuously
measure project performance by relating three independent variables:
1) The Planned Value, the physical work scheduled to be performed, including the estimated
value of this work (previously called the Budgeted Costs for Work Scheduled [BCWS]), as
compared against the
2) The Earned Value, physical work actually accomplished, including the estimated value of this
work (previously called the Budgeted Costs for Work Performed [BCWP]), and to the
3) Actual Costs incurred to accomplish the Earned Value.
The relationship of 2) Earned Value less 1) Planned Value constitutes the Schedule Variance
(SV). The relationship of 2) Earned Value less 3) Actual Costs constitutes the Cost Variance
(CV) for the project.
Additional planning:. Few projects run exactly according to plan. Prospective changes may
require new or revised cost estimates or analysis of alternative approaches.
Computerized tools: Computerized tools, such as project management software and spreadsheets,
are often used to track planned costs versus actual costs, and to forecast the effects of cost
changes.
Outputs from Cost Control
Revised cost estimates. Revised cost estimates are modifications to the cost information used to
manage the project. Appropriate stakeholders must be notified as needed. Revised cost estimates
may or may not require adjustments to other aspects of the project plan.
Budget updates. Budget updates are a special category of revised cost estimates. Budget updates
are changes to an approved cost baseline. These numbers are generally revised only in response
to scope changes. In some cases, cost variances may be so severe that rebaselining is needed to
provide a realistic measure of performance.
Corrective action: Corrective action is anything done to bring expected future project
performance in line with the project plan.
Estimate at completion: An Estimate at Completion (EAC) is a forecast of most likely total
project costs based on project performance and risk quantification. The most common
forecasting techniques are some variation of:

190

_ EAC = Actuals to date plus a new estimate for all remaining work. This approach is most often
used when past performance shows that the original estimating assumptions were fundamentally
flawed, or that they are no longer relevant to a change in conditions. Formula: EAC = AC +
ETC.
_ EAC = Actuals to date plus remaining budget (BAC EV). This approach is most often used
when current variances are seen as atypical and the project management team expectations are
that similar variances will not occur in the future.
Formula: EAC = AC + BAC EV.
_ EAC = Actuals to date plus the remaining project budget (BAC EV) modified by a
performance factor, often the cumulative cost performance index (CPI).
This approach is most often used when current variances are seen as typical of future variances.
Formula: EAC = (AC + (BAC EV)/CPI)this CPI is the cumulative CPI.
Each of these approaches may be the correct approach for any given project and will provide the
project management team with a signal if the EAC forecasts go beyond acceptable tolerances.

Time Control
The first step in establishing a project is to estimate how long each activity will take, from the
time it is started until the time it is finished. This duration estimate for each activity is the time
for the work to be done plus associated waiting time. Its a good practice to have the person who
will be responsible for performing a particular activity make the duration estimate for that
activity. This generates a commitment from that person and avoids bias that may be introduced
by having one person make the duration estimates for all the activity.
An activity duration estimate must be based on the quantity of resources expected to be used on
the activity. The estimate should be aggressive, yet realistic. Throughout the performance of the
project some activities will take longer than their estimated duration, others will be done in less
time than their estimated duration, and a few may conform to duration estimates exactly. Over
the life of a project that involves many activities, such delays and accelerations will tend to
cancel out one another.
In order to establish a basis from which to calculate a schedule using the duration estimates for
the activities, its necessary to select the estimated start time and required completion time for
overall project. These times define overall window or envelope, of time in which the project
must be completed. The projects required completion time is normally part of the project
objective and stated in the contract. Once the, estimated duration for each activity in the network
and an overall window of time in which the project must be completed, you have to decide
whether the activities can be done by the required completion time.
The key to effective project control is to measure actual progress and compare it to planned
progress on a timely and regular basis and to take necessary corrective action immediately. The
project control process involves regularly gathering data on project performance, comparing with
the planned performance. This process must occur regularly throughout the project.
It starts with establishing a baseline plan that shows how the project scope will be accomplished
on time and within the budget. Once this baseline plan is agreed with the customer the project

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starts. A regular reporting period should be established for comparing the actual progress with
the planned progress. Reporting may be daily, weekly, or monthly depending on the complexity
and the duration of the project. During each reporting period, two kinds of data or information
need to be collected.
1. Data on actual performance.
2. Information on any changes to the project scope, schedule or budget.
Once the updated schedule and budget have been calculated, they need to be compared with the
baseline schedule and budget and analyzed for variances to determine whether the project is
ahead or behind the time schedule. The project control process continues throughout the project.
Approaches to schedule control:
Schedule control includes four steps
1. analyzing the schedule determine which areas may be need corrective action.
2. Deciding what specific corrective actions should be taken.
3. Revising the plan to incorporate the chosen corrective actions.
4. Recalculating the schedule to evaluate the efforts of the planned corrective actions.
If the planned corrective actions do not result in an acceptable schedule these steps are repeated.
Throughout a project each time schedule is recalculated whether its after actual data or project
changes are incorporated after the corrective actions, it is necessary to analyze the newly
calculated schedule to determine whether it needs further attention. The schedule analysis should
include identifying critical path and any path of activities.

Performance Evaluation
The ultimate use of all the information obtained during the monitoring stage is to control the
progress of the ongoing activities. Control is to check whether the actual performance is up to the
mark or not and to take corrective action if necessary. Objective measurement of performance is,
therefore, the foundation for the success of a control system. If performance measurement used is
defective, the project controller will be misled by the information he receives into either taking
an unsuitable action or not taking any action at all.
There are several techniques used to measure the progress of a project. The Earned Value (EV)
technique and the Cost/Schedule Control System Criteria (C/SCSC) technique are very popular.
Earned Value Technique
A good technique for measuring the progress of a project should enable its user to measure the
progress in terms of time, cost and performance. The earned value technique contains variances
for measuring the progress in all the three. Earned value is the total budgeted cost of the project

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multiplied by the percent of work completed thus far. By comparing the actual cost incurred so
far with the budgeted cost, it can be found out whether the project is on the right track.
Spending Variance = Actual Cost Earned value of works completed
Schedule Variance = Earned value of the works completed Earned value of the works that
should have been completed by now
Total Variance
= Actual cost of works completed Earned value of the works that should
have been completed by now

Cost/Schedule Control System Criteria (C/SCSC)

Three parameters are considered in this technique for calculating the variances:
(a) Budgeted cost of the work that should have been completed by now, according to the
schedule, or budgeted cost of work scheduled (BCWS),
(b) Budgeted cost of work performed (BCWP)
(c) The cost actually incurred for the works completed, or actual cost of work performed
(ACWP)
Cost Variance= BCWP - ACWP
Schedule Variance = BCWP BCWS
The interpretation of these two variances is the same as we have seen in earned value technique.
The progress of the project compared to the time spent and costs incurred can also be gauged
using the following indices:
Cost performance index = BCWP/ACWP
A value of less than one means a cost overrun.
Schedule performance index = BCWP/BCWS
Value of less than one means a time over run.
Estimated cost performance index = BCTW/ (ACWP+ACC)
Where BCTW = Budgeted cost for total work
ACC = Additional cost for completion

Differences between the amounts of work performed arise due to various factors: changes in the
work elements previously designed to accomplish a task, changes in the methods followed to
carry out elements, changes in the tasks to be accomplished, etc. All these factors also give rise
to cost variances. Other factors such as prices of the inputs change in the mix of the inputs and

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changes in the accounting method also cause cost variance. When such changes occur, the work
plans and budgets should be adjusted accordingly. Otherwise control of the time and cost by
comparison of the actual with the plans becomes impossible.

Project Control System

Control is said to be consist of two elements: one, ensuring that the resources of organization are
not misused and are well maintained and two regulations of the activities of the project.
There are three major resources that the project manager needs to control- physical resources like
plant and equipment, land and building, etc. , the human resources and the financial resources.
Control of physical resources needs technical skill of project manager. Maintenance of assets has
to be carried out at regular intervals. Too frequent maintenance results in heavy maintenance cost
and too less leads to break down. A trade off has to be made between frequency of maintenance.
Control of human resources is highly difficult as any number of appraisal criteria is not sufficient
for maintaining the human resources well. Checking the performance of team members and
declaring that some are better than others, spoils the spirit. The other reasons may be that many
managers consider control procedure as hindrance until something goes wrong. Human resource
accounting did not find enough acceptances with professionals so far.
There are various techniques for control of financial resources as accounting and auditing
system is oriented towards it. Techniques for control of the current assets, budgets and capital
investment screening technique are in widespread use. These techniques are applied through a
series of analyses and audits conducted by the controller.
Types of control system
There are three types of control systems in used: cybernetic control system, go/no-go control
systems and post-control system.
Cybernetic Control
The information input required for a cybernetic control are- the characteristic features of the
output that need to be controlled have to be specified, standards must be set for each
characteristics, sensors to be measure the characteristics to be desired level of accuracy should be
developed. Measurements made by the sensor should then be interpreted into a signal that

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indicates the quality of output. Mechanism for communicating the difference between the quality
of the output and the standard to the decision maker should be determined. The action to be taken
to counteract each and every possible deviation from the standard should be available with the
decision maker.
Concept of cybernetic control is applied frequently for tracking the system and notifying the
project manager automatically about the state of things.
Go/No-go System
Go/No-go systems are used to see if specific preconditions laid down have been met or not.
These types of controls are very popular as almost any aspect of a project is amenable to the
application of this type of control. But proper judgment should be exercised while using these
controls. Certain characteristics of the output may be required to be within clearly laid down
range of values.
The project budget and schedule are the two documents that assist greatly in exercising control.
They contain various milestones, the budget allocation for achievement of each milestone and
the time when it should be achieved. Control can be exercised on the smallest possible task,
based on the information of these two.
Post-Control System
It is comparable to post-mortem of a project. The performance in the execution of the project is
reviewed critically. The objective is to identify what went wrong and to study how to avoid such
mishaps in future projects. The orientation of post-control is towards future, in contrast to the
cybernetic and go/no-go control system.
The document has following sections:
Project Objectives: A brief description of the objectives of the project is given. The objectives
are obtained from the project proposals. Actual performance of the project depends on many
uncontrollable events assumptions regarding those events should be disclosed in this section.
Deviation Report: It contains a comprehensive report on performance of the project as compared
to schedules and budgets. Each and every deviation used to highlight there.
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Report on Project Results: This section contains explanation for all deviations. Major concern in
this section is on how rather what, as how any deviation had happened let it be positive or
negative not what deviation had happened.
Recommendation for Improvement: This is the final section of report and it contains the
recommendations on the pitfalls to be avoided, improvements to be brought about in the systems,
additional skills and equipment to be required, etc.

Features of Good Control System

If a control system should be acceptable by those who will be controlled by it, it should appear to
be sensible to them. The standards laid down under control systems should be achievable using
the systems in operation. In addition to these, the control system should possess the following
characteristics:
Simplicity: The control system, should be easy to operate and maintain
Cost-effective: The cost of control should not be more than the benefits from it
Flexibility: The control system should be flexible enough to extend it to other areas or to
react to unforeseen changes in the levels of system performance
Timeliness: It should be capable of bringing problems to the notice of the project
manager when there is still sometime for coercive action.
Effectiveness: The actions initiated through the control system should be seen to bring
about the desired changes in performance to the desired extent.

Managerial Perspectives in Control

The feeling that they are subject to a control influences the behavior of people substantially. The
response of people to control system can be classified into three:
(i). active participation and attempt to achieve the goals, using the control
(ii). Passive participation, to avoid being reprimanded by the superiors
(iii). Non-compliance with the orders- either by acting in a manner contrary to what has been
told or by just not carrying out the instructions.
Which of the three an individual chooses depend on the perception of the individual on the
quality and suitability of the control, his opinion about the desirability of the goals towards
which the control is oriented, his confidence on his own abilities in achieving the goal, the
punishment that entails non-compliance, his temperamental tolerance towards being controlled
and other similar factors. But a general trend of how individuals react to different types of
control has been determined by social researchers.

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Chapter-4
Project Review & Control
End Chapter Quizzes
1. Variance analysis approach is
(a). A traditional approach
(b). Incapable of looking forward i.e., it cannot predict what may happen in future
(c). Not useful for calculating the value of work done
(d). A tool which merely indicates what amount of resources were expended compared to
the budgeted resources
(e). All of the above
2. Which of the following statement/s is/are true regarding performance analysis?
a. BCWS consists of budgets for work packages actually completed.
b. ACC stands for actual cost of completion.
c. ACWP stands for actual cost of work planned.
d. BCTW comprises of total budgeted cost for the entire project.
e. All of the above
3. A critical review of the execution of the project after its completion is called
a. Cybernetic control
b. Go/No-go control
c. Post-control
d. Exception control
e. None of the above.
4. Which of the following statements is true regarding project control?
a. Cybernetic control is like steering an automobile.
b. Third order cybernetic control systems invariably contain a human element.
c. The informational inputs required for cybernetic control are quite complex.
d. The second order cybernetic controls use a single standard all the time.
e. Both (a) and (b) above.
5. Which of the following statements is false?
a. The control system should be easy to operate and maintain.
b. The cost of control should not be overriding criteria while designing the control system for a
project.
c. The control system should not be rigid to react to unforeseen changes.
d. The control system should be capable of indicating the problem areas when there is still time
for corrective action.

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e. The actions initiated through the control system should be seen to bring about the desired
changes in performance to the desired extent.
6. Schedule Performance Index is equal to
a. Budgeted Cost for Work Completed Actual Cost of Work Performed
b. Budgeted Cost of Work Performed/Actual Cost of Work Performed
c. Budgeted Cost of Work Performed/Budgeted Cost of Work Scheduled
d. Budgeted Cost of Work Performed Budgeted Cost of Work Scheduled
e. Budgeted Cost of Work Performed Actual Cost of Work Performed
7. A certain activity has a budgeted cost of Rs.80,000 and at the time of the periodic progress
review it is estimated that 60 percent of the work has been accomplished at the cost of Rs.52,800.
Therefore cost over-run (under-run) is
a.9.1%
b.34.0%
c. (10%)
d. (9.1%)
e.10%
8. Which of the following aspects related to a project cannot be monitored by comparison of
works with the schedules?
a. Cost of the project
b. Morale of the employee
c. Completion time of the project
d. Attitude of the client
e. Both (b) and (d) above.
9. Which of the following is/are true if the budgeted cost for work performed for a project is
Rs.100 crore and the actual cost of work performed is Rs.150 crore?
a. The cost performance index is 0.67.
b. It means that the project is facing a cost overrun.
c. The cost performance index is 1.50.
d. The project is facing a time overrun.
e. Both (a) and (b) above.
10. A project gives an NPV of Rs.10 crore if held till the end of its life and it costed Rs.50 crore
to implement. It provides cash flows at the rate of Rs.15 crore per annum in the next two years
from now and an additional inflow of Rs.75 crore if abandoned at the end of two years from
now. The cost of capital is 10%.
Which of the following statements is true?
a.The project may be abandoned after two years, as the NPV on abandonment is higher than
Rs.10 crore.
b. t cannot be abandoned after two years, as the NPV on abandonment is lower than Rs.10 crore.
c. It can be abandoned after two years, as the NPV on abandonment is equal to Rs.10 crore.
d.It may or may not be abandoned after two years, as the NPV on abandonment is equal to Rs.10
crore.
e.None of the above.

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Chapter-5
Project Examination
S. No.

Content

Page no.

Evaluation of Project

200

Impact Analysis

201

Project Auditing

204

Project Termination

205

Abandonment Value Analysis

210

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Project Examination
Evaluation of Project
Project evaluation is a process of evaluating a projects progress and performance in comparison
with its planned progress and performance or with that of identical projects. Also, project
evaluation should be supportive to all the management decisions that the project requires. So, the
manner in which a project is evaluated should make the management feel that all the relevant
data has been considered. Project evaluation is considered to be as important as the project itself.
The objective of project evaluation is to measure the degree of projects success. A survey on
industrial projects of different nature and size identified four critical parameters for measuring
the success of a project. A survey on industrial projects of different nature and size identified
four critical parameters for measuring the success of project. As2. Completion of project in a given time and budget
3. Extent to which the project is able to satisfy the client
4. Commercial success of the project and market share captured by the product delivered by
the project
5. Ability of the product to succeed if it enters a new market
Apart from measuring the success of a project, project evaluation aims at identifying the various
strengths and weaknesses of project. This will help organization to manage its future projects
better. Project evaluation helps the organization and project team to
1. Identifying problems during the early stages of project
2. Ensure clarity in performance, cost and time relationship
3. Enhance the performance of the project
4. Explore opportunities for technology advancements in future
5. Appraise the quality of project management
6. Minimize the costs of project
7. Accelerate the process of achieving results
8. Find, correct and avoid mistakes in future
9. Communicate information as desired in future
10. Check the firms interest and commitment to the project
Apart from above primary objectives project evaluation do have some secondary objectives also
like1. Understanding the importance and role of project in organization
2. Improving the way in which projects are organized and managed

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3. Attempting to create a healthy working environment and encouraging the creativity of

team members
4. Exploring strengths and weaknesses of organization concerned with projects team
members, management and decision-making processes.
5. Trying to identify the risk factors associated with the projects towards the growth of team
members
6. Identifying individuals with excellent managerial and leadership skills

Impact Analysis
Identifying the full consequences of change is also known as Change Impact Analysis, Impact

Change Analysis and Solution Effect Analysis. When things change in your organization, do you
ever wish that someone would think things through a little better to avoid the confusion and
disruption that often follows? Or have you ever been involved in a project where, with hindsight,
a great deal of pain could have been avoided with a little more up-front preparation and
planning?
Hindsight is a wonderful thing but so, too, is Impact Analysis. This technique is a useful and
severely under-used brainstorming technique that helps you think through the full impacts of a
proposed change. As such, it is an essential part of the evaluation process for major decisions.
More than this, it gives you the ability to spot problems before they arise, so that you can
develop contingency plans to handle issues smoothly. This can make the difference between
well-controlled and seemingly-effortless project management, and an implementation that is seen
by your boss, team, clients and peers as a shambles.
Impact Analysis Checklist for Requirements Changes
Implications of the Proposed Change
Identify any existing requirements in the baseline that conflict with the proposed change.
Identify any other pending requirement changes that conflict with the proposed change.
What are the consequences of not making the change?
What are possible adverse side effects or other risks of making the proposed change?
Will the proposed change adversely affect performance requirements or other quality
attributes?
Will the change affect any system component that affects critical properties such as safety
and security, or involve a product change that triggers recertification of any kind?
Is the proposed change feasible within known technical constraints and current staff skills?
Will the proposed change place unacceptable demands on any computer resources required
for the development, test, or operating environments?
Must any tools be acquired to implement and test the change?
How will the proposed change affect the sequence, dependencies, effort, or duration of any
tasks currently in the project plan?

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Will prototyping or other user input be required to verify the proposed change?
How much effort that has already been invested in the project will be lost if this change is
accepted?
Will the proposed change cause an increase in product unit cost, such as by increasing thirdparty product licensing fees?
Will the change affect any marketing, manufacturing, training, or customer support plans?
System Elements Affected by the Proposed Change
Identify any user interface changes, additions, or deletions required.
Identify any changes, additions, or deletions required in reports, databases, or data files.
Identify the design components that must be created, modified, or deleted.
Identify hardware components that must be added, altered, or deleted.
Identify the source code files that must be created, modified, or deleted.
Identify any changes required in build files.
Identify existing unit, integration, system, and acceptance test cases that must be modified or
deleted.
Estimate the number of new unit, integration, system, and acceptance test cases that will be
required.
Identify any help screens, user manuals, training materials, or other documentation that must
be created or modified.
Identify any other systems, applications, libraries, or hardware components affected by the
change.
Identify any third party software that must be purchased.
Identify any impact the proposed change will have on the projects software project
management plan, software quality assurance plan, software configuration management plan,
or other plans.
Quantify any effects the proposed change will have on budgets of scarce resources, such as
memory, processing power, network bandwidth, real-time schedule.
Identify any impact the proposed change will have on fielded systems if the affected
component is not perfectly backward compatible.
Effort Estimation for a Requirements Change
Effort
(Labor Hours)

Task
Update the SRS or requirements database with the new
requirement
Develop and evaluate prototype
Create new design components
Modify existing design components
Develop new user interface components
Modify existing user interface components
Develop new user publications and help screens
Modify existing user publications and help screens
Develop new source code
Modify existing source code
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Purchase and integrate third party software

Identify, purchase, and integrate hardware components; qualify
vendor
Modify build files
Develop new unit and integration tests
Modify existing unit and integration tests
Perform unit and integration testing after implementation
Write new system and acceptance test cases
Modify existing system and acceptance test cases
Modify automated test drivers
Perform regression testing at unit, integration, and system levels
Develop new reports
Modify existing reports
Develop new database elements
Modify existing database elements
Develop new data files
Modify existing data files
Modify various project plans
Update other documentation
Update requirements traceability matrix
Review modified work products
Perform rework following reviews and testing
Recertify product as being safe, secure, and compliant with
standards.
Other additional tasks
TOTAL ESTIMATED EFFORT

Procedure:
1.
2.
3.
4.
5.
6.
7.

Identify the subset of the above tasks that will have to be done.
Allocate resources to tasks.
Estimate effort required for pertinent tasks listed above, based on assigned resources.
Total the effort estimates.
Sequence tasks and identify predecessors.
Determine whether change is on the projects critical path.
Estimate schedule and cost impact.

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Impact Analysis Report Template

Change Request ID: ______________
Title:
______________________________________________________
Description:
______________________________________________________
______________________________________________________
Analyst:
__________________________
Date Prepared:
__________________________
Prioritization Estimates:
Relative Benefit:
Relative Penalty:
Relative Cost:
Relative Risk:
Calculated Priority:
Estimated total effort:
Estimated lost effort:
Estimated schedule impact:
Additional cost impact:
Quality impact:

(1-9)
(1-9)
(1-9)
(1-9)
(relative to other pending requirements)
___________ labor hours
___________ labor hours (from discarded work)
___________ days
___________ dollars
__________________________________________

Other requirements affected:

_____________________________________
___________________________________________
Other tasks affected:
________________________________________
______________________________________
Integration issues:
_______________________________________
Life cycle cost issues:
________________________________________
Other components to examine __________________________________________
for possible changes:
____________________________________________

Project Auditing
Post control tries to enhance the firms chances of meeting future project goals. An organization
can benefit from its past experience only when it tries to understand them through the process of
evaluation. The term evaluate means to make a judgment as to worth or value of a product or
an activity. In project management context project evaluation is the process of appraising the
progress and performance of the project in comparison to the planned objectives.
A project can be evaluated by using evaluation tools such as Project Audits and Project Reviews.
An audit is a formal enquiry in to various aspects of the project that are of interest to the top
management.

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The basic responsibility of any project auditor is to convey the facts. It is required to
acknowledge the presence of different kinds of biases of the people involved in project. The
auditor should be aware of his limitations and seek external help when he has to audit aspects of
the project that are beyond his area of expertise. All the information gathered should be kept
confidential until the audit report is released officially.
Responsibilities of the Auditor
The basic responsibility of any project auditor is to convey the facts. This responsibility is not as
simple as it seems to be. It is required to acknowledge the presence of different kinds of biases os
the people involved in the project. The auditor should be aware of his limitations and seek
external help when he has to audit aspects of project that are beyond his area of expertise. All the
information gathered should be kept confidential until the audit report is released officially. He
should not allow any political or technical pressures to influence his audit report.
The seriousness with which the top management and the project team regard the audit report
depends on the credibility of the information being presented in the report. The data should be
checked and calculated very carefully in order to ensure its accuracy. It is the responsibility of
the auditor to explore the ways in which can enhance the effectiveness, efficiency and value of
auditing process.
Project Audit Life Cycle
A project audit life cycle involves a systematic advancement of pre-defined events. The six
events that constitute a project audit life cycle:
Audit Initiation: It is the beginning of the audit process. Purpose and scope of the project audit
is defined in this step.
Defining Project Baseline: In this phase performance standards being set to enable the auditors
to measure the project performance and achievement against the standard set.
Setting up an audit database: In this phase a database is being develop.
Preliminary analysis of project
Preparing audit report
Project audit termination

Project Termination
Like all things have a beginning, projects too must have an end. The ending of a projects
generally takes place for two reasons: One, the project having been completed successfully- there
is no more to do (i.e. project success). Two, the project has been found to be unworthy of
continuation, for any reason( project failure or undesirability).
Project success means that the time, cost and technical performance specifications have been met
and the project is ready for absorption into the customers organization or the parent
organization, as the case may be. A successful project indicates that the firm has been able to
design and implement a predesigned strategy and has successfully completed yet another
business transaction.

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Project failure or undesirability may manifest itself in many ways:

(i). The project has not s far met its time, cost or technical performance requirements and there
appears no hope of it ever meeting them. Termination may considered even if the project fails to
meet the target in any one of the three aspects.
(ii). There are other projects which have moved up in order of priority and the funds available are
not sufficient for all the projects.
(iii). The parent firm has changed its strategy and the project no longer fits into the strategic plan
of the parent.
(iv). The changes in the business environment have made project unviable.
(v). The project has become obsolete due to technological changes.
(vi). Some people, without whom the project cannot progress, have left the organization.
(vii). Haphazard initial planning of project, resulting in a realization at a later stage that the
project is not feasible.
(viii). A better alternative could be found to achieve the objectives for the achievement of which
the current project has been planned.
The above reasons for project termination are not very clearly demarcated. The list is illustrative
not exhaustive. There is overlap between some of them. But, nevertheless they give a good idea a
factors that force firms into terminating projects.

Projects are always based on forecasts and assumptions regarding future. Manager of the project
and the owners of the firm should be ready to accept even in case of failure rather than somehow
try to believe that it will be a success. The closing out the project as a failure may mean that
project manager losses his job or is shunted out to another job. From the point of view of top
management, termination is not considered advisable because of the fear that the project manager
and his staff may not put in their best efforts if it is known that the top management is generally
not averse to premature termination of the project if things go wrong.
Funds from successful project may be transferred to another project that is facing a cost overrun,
in a bid to keep the latter project from being terminated. When a project appears to be successful,
the management gets seriously committed to it.
The news of termination of a project kills the morale of the workers involved in it. It becomes
almost impossible task to get them interested in other projects that are not running too well also
feel insecure. In such circumstances, the general reaction is to try for jobs outside the
organization, rather than work hard to improve the condition of the project.

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Methods of Project Termination

The termination of project can be identified when one or more of these symptoms appear: the
work has been stopped, or the pace of work has reduced so much that completion of the project
is no longer possible, or the project has been suspended indefinitely and restart of work is
unlikely, or the resources allocated have been diverted to other department or projects. Though
there are many indications that point towards termination of the project, the methods of
termination of project, the methods of termination of projects most commonly be three:
a. Extinction or stopping of work
b. Inclusion or absorbing into parent company
c. Integrating the assets and functions of the project into parent company
Extinction may take place when the project has been completed and hence there is nothing more
to do, or when the project is considered a failure beyond redemption. In addition to these, there
are also other reasons such as projects getting caught in political rivalries of project managers
and the project of the project manager who loses the political battle getting extinct. Mergers and
Acquisition may also make some projects redundant and they have to be terminated by
extinction. When a project is terminated by extinction, though the actual work that forms the
substance of the project is stopped, a lot of other activity takes place. Release of the members of
the project team and assigning them to various departments, disposal of property, materials and
equipments to other departments, based on their needs and priorities and in accordance with
agreements with the client, if any, or as directed by parent organization should be carried out.
The final task of the project manager is generally to prepare a final report on the project, called
project history (a post control report).
Inclusion is to include a project as part of the organization. Inclusion is the method used when a
project is a success and can be institutionalized as a part of the parent, say as a new division or
department. In the initial stages, generally, the new division is given a special status and nurtured
carefully. But as time passes by, it will have to learn the corporate culture and withstanding
competition, as the people who have initiated the project and taken care of it all through will
slowly move on to the other projects. Though the termination of project in this method to, is
marked by stopping of project related activities, there is a lot of dissimilarity in other aspects
when compared to extinction. The personnel posted on the project continue to work for the
newly created division and do not return to their original department.
In Integration, the property and functions of the project are absorbed into the parent, and are
distributed among the existing departments. In contrast to inclusion where the project is included
as a separate division, in integration, the property, equipments, and functions of the project are
broken up and are allocated to the responsibility of existing departments. The level of problems
faced during integration depend on the familiarity of the organization with the technology now
sought to be integrated and its experience in handling integration before, whether or not related
to the present project.
There is one more method of project termination is slow killing. In this method the budget being
reduced drastically but does not announce the project is being closed. Due to paucity of funds,

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the staff will be slowly transferred to other projects and project will still remain as it was. This is
generally accomplished over a period of few years, depending on the size of project.
Method of Project Termination
Regardless whether a successful project is completed by inclusion, integration, or extinction, a
plan must be developed to terminate it. An organization that is project-oriented may have a
"termination manager" whose primary responsibility is to effectively and efficiently end projects.
The duties of a termination manager may include the following:
Ensure the project is complete
Ensure delivery and client acceptance
Prepare a final report
Ensure that all bills have been paid and that the final invoice has been sent to the client
Redistribute personnel, materials, equipment, and any other resources
Determine what records (manuals, reports, and other paperwork) are to be kept and place
them in storage
Assign responsibility for product support, if necessary
Oversee the closing of the project's books
It is equally as important that team members not be penalized for participating in what may turn
out to be an unsuccessful project. If team members are penalized, they will be less willing to end
a project or will become risk averse.
This brings us to the human side of the termination process. Senior management and the team
leader must recognize and reward the accomplishments of the project team. Doing so creates a
corporate culture that encourages success and the motivation to do well. Acknowledging the
dedication and achievements of the project team will enable team members to proceed to their
next assignment with a more loyal and positive attitude. Unfortunately, near the end of a project
it is easy to neglect these kinds of important details because most of the team is looking forward
to the next project, or worse, do not want the project to end.
Impact of Project Cancellation
A project may be canceled for a variety of reasons, including lack of funding, technological
obsolescence, changes in consumer trends, mergers and acquisitions, loss of the "champion," and
negative cost/benefit relationships. Although the reasons may vary, the impact is frequently the
same. Project cancellation can affect employee productivity, the reputation of the firm, and the
value of the firm's stock. Although there is little research on the topic of employee productivity
and project cancellation, what little there is suggests that a project team's perception of the
cancellation may influence their productivity for the next several years. However, there are
guidelines to help soften the impact of cancellation on the team. To begin with, it is essential that
the project team be included in the cancellation process and should be made aware of the
rationale behind the cancellation well before the official announcement. Moreover, this rationale
should be consistent with the perceptions of the project team.
A study found eight factors that influenced whether an employee perceived the cancellation of a
project negatively:
1. The rationale for cancellation.

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2. Communication between management and the project team.

3. Careful planning for the cancellation process.
4. Strong management commitment and support for the project from its beginning.
5. Effective planning and leadership of the project.
6. Prompt and comparable reassignment of project personnel.
7. Acknowledgment of the efforts of the project team.
8. Participation of the project team in the cancellation decision-making process.
As might be expected, the output and commitment of team members immediately before a
project is cancelled, and for one or two months after the announcement, will be drastically
reduced. This loss in productivity and commitment will be exacerbated if the project team
perceives the cancellation negatively. Worse, the individual's commitment to the organization
may depend on his or her perception of the cancellation. Employees that view a cancellation in a
more positive light will have higher levels of commitment than do those who view it more
negatively.
How a project is viewed within the organization is also very important. Because corporate
resources can be very limited, projects that are perceived to be draining scarce resources tend to
undercut morale. Other project teams envy the resources "squandered" on unproductive or falling
projects. This, in turn, leads employees to question the wisdom of senior management, and
reduces their productivity and level of commitment to the organization.
The impact of cancelling a project on the firm's market value can vary. If information on the
project was readily available, and Wall Street already viewed the project as a drain on the
company's resources, then the announcement will tend to bolster the company's stock.
Post-Audit Review
The importance of a final report cannot be overemphasized. An objective review of the project's
successes and shortcomings can provide senior management with insights into how to improve
future projects. The final report is also a valuable tool to help future project managers, since it
includes not only what worked, but also what did not, and recommendations for similar projects
in the future.
This report should focus on the following functional areas: project performance, administrative
performance, organizational structure, project and administrative teams, and project management
techniques. Each section should compare actual results to the project's planned objectives.
Because an organization's "culture" can have a significant impact on the efficiency of the project
team, the administrative performance section should be written with an eye toward developing a
more effective organizational culture. Reporting how well the organization's structure helped or
hindered the project is also important. Depending on the firm's experience in managing projects,
companies may want to adjust their organizational structure after each one. Because teamwork is
essential to the success of a project, a confidential section should be included that discusses the
team members, their abilities, aptitudes, and willingness to work as a team. This will help senior
management determine which employees should be made part of the next project team.
Keeping a project on target, within budget, and within required specifications entails accurate
forecasting and control. A thorough analysis of forecasting, planning, budgeting, scheduling,

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resource allocation, and control techniques used during the project will help improve the future
projects.

Abandonment Value Analysis

The decision to abandon or not is evaluated for the present. The evaluation is done to check
whether the project should be closed down now, or whether it can be held for one more years.
Following four steps used for analysis:
1.
Calculate the cash flows of the project if abandoned now. This is equal to the value of the
project if sold off or sold as scrap.
2.
Calculate the present value of cash flows if the project is held till the end of its economic
life.
PV= (CF/(1+k)t + TV/(1+k)t
CF= Cash flow from the project
k= Opportunity cost of capital
TV= Terminal value of project
t= Time in year
3.

Compare the present value derived from project if run successfully through its economic
life with its value if project is abandoned now.
Project will abandoned if value derived from cash flows earned throughout its successful
run in its economic life is less than its value if that project abandoned right now.

Example:
ABC Ltd. is seriously considering whether it should abandon the thermal power project recently
set-up by it. If the project is sold off now, the company will realize Rs. 780 crore. If the project is
sold as scrap at the end of its life, the realization is likely to be Rs. 5 crore. The cash flows
expected to accrue during the life of the project are as follows:
Year

Cash flow (Rs. Crore)

150

170

170

185

185

200

210

170

Should the company abandon the project? The opportunity cost of capital of the company is
12%.
Solution:
Step 1:
PVp = Rs. 780 crore
Step 2:
PVc = (150/1.12) + (170/1.122) + (170/1.123) + (185/1.124) + (185/1.125) + (200/1.126) +
(170/1.127) + (5/1.127)= 793.49
Step 3:
793.49>780 or
PVe>PVp
Therefore, the project should continue to be held and should be evaluated at the end of year 1.

Once the decision to terminate is taken, the process of termination should be initiated. As
already mentioned, it is necessary to plan the termination systematically if it should proceed
smoothly and with minimum pain. Sometimes the project manager, because of his familiarity
with the project, is asked to oversee the termination process. If the project manager is not being
posted to manage another project, termination of the current project will mean the end of his
power. Therefore, there will be a tendency to prolong the termination process. Rather than
prolonging the process, the project manager may also complete apathy towards the project and
leave it entirely to the project administrator. Therefore firms often appoint a termination manager
to oversee the process. The person appointed is generally non-technical, but familiar with the
procedures and formalities of termination. If technical knowledge is called for, one of the
members of the project team is appointed as his deputy. The duties of the termination manager
are:
(i). Making sure that the work is complete and ready for delivery.
(ii). Informing the client about the delivery and making sure that the delivery takes place
smoothly.

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(iii). Preparing the invoice correctly and sending it to the client.

(iv). Checking whether the documentation, particularly that relating to the client is complete and
accurate and getting it rectified if necessary.
(v). Assigning the personnel to functional departments and other projects, depending on the
requirement and desires of the personnel.
(vi). Disposing the assets either by transfer to other departments and/or project or by selling off.
(vii). Deciding on what are all the records that have to be preserved for future reference and
arranging for their safe-keeping.
(viii). Making sure that the accounts of the projects have been made properly and have been
closed.
(ix). Communicating to functional departments the support and maintenance services that may be
required by the client.
As can be understood from the foregoing discussion, termination is quite a complex task. People
entrusted with the responsibility of termination, therefore, use checklists to make sure that they
are not missing any important tasks. One such checklist follows:
Project Title:

Completion Date:

Contract No.:

Cost Type:

Customer:

Project Manager:

The project close-out check lists are designed for use in the following manner:
Column 1: Item no.
Column 2: Task description
Column 3: Required, YES or NO
Column 4: Date Required
Column 5: Assigned responsibility
Column 6: Priority
Column 7: Notes, Reference

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Chapter-5
Project Examination
End Chapter Quizzes
1. What might be the reason/s for the undesirability of continuation of the projects?
a. As funds available are not sufficient for all the projects, the management is forced to wind up
some viable projects too.
b. Changes in technology result in the obsolescence of the current project.
c. The resignation of some key people who are working in the project.
d. Sometimes the parent firm may change its entire plans strategically as such the continuation of
the current project may become unsuitable to the changed environment.
e. Both (b) and (d) above.
2. Which of the following statement/s is/are true?
a. Top management will never recognize the unviability of the project. Instead they always insist
the project managers to turn the unfavorable to favorable at any cost.
b. When project managers perceive that the project is no longer viable they immediately advise
the top management to terminate the project.
c. As it is a question of prestige and affects their career project managers dislike to declare the
failure of a project.
d. Project managers announce the project failure immediately, otherwise top management may
not believe their honesty and integrity in doing the things.
e. None of the above.
3. Which of the following is/are reason/s for the extinction of a project?
a. Political rivalries of the project managers.
b. Mergers and acquisitions.
c. Project failure beyond redemption.
d. Successful completion of the project.
e. All of the above.
4. In integration method of termination
a. The project is taken up as separate division of the parent firm
b. The personnel of the project are absorbed into the parent organization while the property is
sold-off
c. Property relating to the project is sold and the personnel are laid off
d. Both the property and functions of the project are broken up and are integrated into the
existing departments
e. None of the above.
5. Slow killing is a method of
a. Winding up successful project due to political pressures
b. Termination in which the management reduces the budget and slowly transfers the staff to
other projects without announcing termination
c. Termination of a project due to paucity of funds
d. Termination of a project due to lack of required personnel
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e. None of the above.

6. Abandonment of a project should be considered when
a. The project is not feasible technically though it can be completed within the stipulated costs
b. It is feasible technically but it cannot be completed within the stipulated cost and time
c. If the PV of cash flows are more at the time of the proposal for abandonment than the PV of
cash flows realizable if the project is continued through its life
d. Both (a) and (c) above
e. All of (a), (b) and (c) above.

7. The abandonment value analysis helps in finding out.

i. The ideal time for abandonment of a project.
ii. How a project should be abandoned.
iii. Why a project should be abandoned.
a. Only (i) above.
b. Only (iii) above.
c.Both (i) and (ii) above.
d. Both (i) and (iii) above.
e. Both (ii) and (iii) above.
8. In which of the following methods of project termination a successful project is
institutionalized as a part of parent company, say as new division or department?
i. Extinction.
ii. Inclusion.
iii.Integration.
a.Only (i) above.
b.Only (ii) above.
c.Both (i) and (iii) above.
d.Both (i) and (ii) above.
e.Both (ii) and (iii) above.
9. The method of project termination in which the property and functions of the project are
absorbed into the parent and are distributed among the existing departments is
a. Extinction
b. Inclusion
c. Absorption
d. Integration
e. Both (b) and (d) above.
10. The method of estimation of terminal cash flow as net salvage value of fixed assets plus net
recovery of working capital margin
a. Generally overestimates a projects viability
b. Ignores intangible benefits of a project that may be lost after termination of the project
c. Estimates net salvage value of fixed assets at book value
d. Estimates recovery of working capital margin at market value

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e. Both (a) and (d) above.

215

Key to end chapter quizzes:

Chapter 1
1e, 2 d, 3. c, 4 c, 5 c, 6 d, 7 d, 8 c, 9 b, 10 a
Chapter 2
1 b, 2 d, 3 a, 4 b, 5 c, 6 e, 7 a, 8 c, 9 a, 10 d
Chapter 3
1 c, 2 a, 3 c, 4 d, 5 b, 6 e, 7 d, 8 c, 9 b, 10 c
Chapter 4
1 e, 2 d, 3 c, 4 e, 5 b, 6 c, 7 e, 8 e, 9 e, 10 a
Chapter 5
1 e, 2 c, 3 e, 4 d, 5 b, 6 c, 7 a, 8 b, 9 b, 10 b

216

Bibliography
1. Machiraju H. R. 2001, Introduction to Project Finance: An Analytical Perspective, Vikas
Publishing House Pvt. Ltd.
2. Goel B.B. 2001, Project Management: A Development Perspective, Deep & Deep
Publications
3. Chandra P. 2002, Projects: Planning, Analysis, Financing, Implementation & Review, 4th
Ed. Tata McGraw-Hill Publishing
4. Meredith J. R. & Mantel S. J., Jr. 2000, Project Management: A Managerial Approach,
4th Ed. John Wiley & Sons
5. Thakur D. 1992, Project Formulation & Implementation, Deep & Deep Publication
6. Pandey I. M. 2001, Financial Management, Vikas Publishing House Pvt. Ltd.

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